FINANCIAL SECTOR DEVELOPMENT AND INEQUALITY: IS THERE A FINANCIAL KUZNETS CURVE?

In: Journal of international development: the journal of the Development Studies Association, Volume 25, Issue 7, p. 897-911

Abstract

AbstractThe existing empirical knowledge in the area of financial sector development and income inequality finds evidence for the theoretical work which posits a simple, linear relationship between the two variables. In this article, we subject the extant empirical knowledge to close scrutiny and point out to a potential dynamic and endogenous relationship between financial sector development and inequality. By using dynamic multivariate panel data analysis on a carefully selected data set of income inequality data for developed and developing countries spanning the period 1962–2006, we find robust empirical evidence for the existence of an inverted U‐curve relationship between financial sector development and income inequality. In that token, we confirm the theoretical stipulations of Greenwood and Jovanovic (1990) for an inverted U‐curve relationship between the financial sector and income inequality. Copyright © 2012 John Wiley & Sons, Ltd.