Financial development and income distribution inequality in the euro area

• Published in: Economic modelling 2018-04, Vol.70, p.40-55
• Main Authors: Baiardi, Donatella, Morana, Claudio
• Format: Article
• Language: English
• Subjects: Euro area; Financial development; Financial stability; Income distribution inequality; Kuznets curve; Real convergence; Subprime mortgage and sovereign debt crisis
• ISSN: 0264-9993; 1873-6122
• DOI: 10.1016/j.econmod.2017.10.008

The paper yields new evidence on real income convergence for euro area (EA) countries since the mid-1980s, with a special focus on the effects of the subprime and sovereign debt financial crises. By conditioning the turning point per capita income of the Kuznets curve (KC) to the level of financial development, we find strong evidence in favor of an EA-wide steady-state financial KC and of ongoing convergence across EA members toward a common per capita income turning point level. By means of a counterfactual analysis, we also point to worsening economic and income inequality conditions for all the EA countries, only partially ensued from “austerity” policies. Hence, a well-functioning financial system and its smooth development appear to be instrumental not only to economic growth, but also to a more egalitarian income distribution. •We find evidence of a financial Kuznets curve for the Euro Area (EA).•EA members are converging toward a common per capita turning point value.•Income inequality has worsened during the recent financial crises.•A “too much finance” phenomenon is also detected during the crisis.•Financial stability is instrumental to both growth and income equality.