The effects of financial deepening on income inequality based on grey incidence analysis

Abstract

Purpose -The purpose of this paper is to clarify the relationship between income inequality and financial deepening. The majority of theoretical studies on the relationship between them argue that financial deepening has a positive effect on the income inequality. This paper aims to study the case of China, and explores whether the effects of financial deepening on income inequality varies between urban residents and rural residents. Design/methodology/approach -Using the grey incidence analysis, this paper first calculates the degree of grey incidence between dependent variables, i.e. per capita disposable income of urban residents, per capita net income of rural residents and overall Theil Inequality Index for China, and independent variables, depth of credit, depth of direct financing and depth of insurance. Next, multiple non-linear regression is introduced to build the model. With the method of unit root test and co-integration test, some equations are given to show the clear relationship among the variables. Findings -The empirical results indicate that the development of credit market does not have a strong relationship both with the growth of income and income inequality. While the development of both the direct financing market and the insurance market is closely related to the growth of income and income inequality. Originality/value -The results of this paper suggest that the protection of the rights and interests of medium-sized investors is the key for the capital market. Meanwhile, the insurance market should be encouraged to expand in both breadth and depth, which helps to take full advantage of its functions. As for the credit market, more resources should be allocated to those who need them most the small-and medium-sized enterprises, which will contribute to the growth of the income for the majority and narrowing the income gap.

Financial Deepening and Income Inequality in Indonesia

“…In long term it has a significant negative relationship. This study supports Zhang (2014) where the development of direct financing market (stock market) and market insurance are closely related to growth and income inequality. Moreover, Kus (2012) also revealed that the stock market encourages the concentration of income in high-income groups especially when the stock market stands in a golden period.…”

“…However, the different result was revealed by Zhang (2014). The empirical results indicate that credit depth does not have a strong connection with both income growth and income inequality.…”

“…The study of the financial deepening relationship with income inequality has been conducted by several researchers such as Ang (2010), Zhang (2014), Kotarski (2015) and Chen and Kinkyo (2016). Zhang (2014) remarked that financial deepening led to revenue growth, deepening finances, raising income inequality, developing direct financing, and insurance markets had positive effect on revenue growth, the development of the direct financing market and increasing insurance inequality income; the effect is strong in the long term, and there is a co-integration of the correlation between the dependent and independent variables. Meanwhile, another study by Ang (2010) revealed that while financial development helps to reduce income inequality, financial liberalization seems to aggravate it.…”

“…In the study conducted by Zhang (2014) in China on the relationship of financial deepening with income inequality in 1992-2012, he says that (a) financial deepening encourages income growth; (b) financial deepening increases income inequality; (c) market development of direct financing and insurance have a positive effect on income growth; (d) development of direct financing and insurance markets increases income inequality and (e) the effect is strong in the long run and there is a cointegration correlation between the dependent variable and the independent variable.…”

Grey relational analysis between Turkey’s macroeconomic indicators and domestic savings

“…GRA is a method applied to determine the relationship between two different sequences considering the similarity degree of geometric shapes of the sequence curve (Liu et al, 2016). The analysis is used as an alternative method in many areas such as business world (Delcea et al, 2013;Wu et al, 2010), medical science (Lin et al, 2009;Zhu et al, 2016), engineering (Karimi and Forrest, 2014;Zhang and Zou, 2016), management (Huang, 2016) and economics (Camelia, 2015;Mao et al, 2015;Zhang, 2014).…”