A closer look at financial development and income distribution

Abstract

a b s t r a c tThis paper analyzes the under-investigated relationship uniting financial development and income distribution. We use a novel approach taking into account for the first time the specific channels linking banks, capital markets and income inequality, the time-varying nature of the relationship, and reciprocal causality. We construct a set of annual indicators of banking and capital market size, robustness, efficiency and international integration. We then estimate the determinants of income distribution using a panel Bayesian structural vector autoregressive (SVAR) model, for a set of 49 countries over the 1994-2002 period. We uncover a significant causality running from financial sector development to income distribution. In addition, the banking sector seems to exert a stronger impact on inequality. Finally, the relationship appears to depend on the characteristics of the financial sector, rather than on its size.

Microstructures, financial reforms and informational efficiency in an emerging market

“…In particular, the effects of past efficiency on current liquidity, volatility and the total shareholders could be considered. This analysis could be conducted in a panel Vector Autoregression (SVAR) framework, similar to Gimet and Lagoarde-Segot (2011).…”

“…To circumvent this issue, the literature provides a menu of procedures for estimating the spread, which use low frequency (daily) returns data. As is shown in Goyenko et al (2009), one such proxy that precisely estimates the magnitude of bid-ask spreads, relative to other proxies, is the Gibbs sampler trading cost estimate. Following Lipson and Mortal (2009), this proxy is used as a measure of transaction costs.…”

Nonlinearity in the financial development–income inequality nexus

“…Beck et al (2007) show, based on a sample of 72 countries for the period 1960-2005, that financial development disproportionately benefits the poor and hence improves income inequality. By contrast, both Rodriguez-Pose and Tselios (2009) and Gimet and Lagoarde-Segot (2011) find an inequality-increasing 0147-5967/$ -see front matter Ó 2011 Association for Comparative Economic Studies Published by Elsevier Inc. All rights reserved. doi:10.1016/j.jce.2011.07.002 impact of financial development, respectively, in the regions of the European Union over the period 1995-2000 and in a set of 49 countries during the period 1994-2002.…”

Does financial market growth improve income distribution? A comparison of developed and emerging market economies of the global sample

“…Authors confirm that financial development increases income inequality by raising wages of highskilled labour while reducing wages for low-skilled labour. Law and Tan (2009) and Gimet and Lagoarde-Segot (2011) do not construct an overall index for financial development; rather, they evaluate the effects of bank development and stock market development separately. By controlling for country fixed effects, possible endogeneity problems, GDP per capita, and other control variables, they find that financial development increases income inequality.…”