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A closer look at financial development and income distribution

This 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 r...

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Bibliographic Details
Published in:Journal of banking & finance 2011-07, Vol.35 (7), p.1698-1713
Main Authors: Gimet, Céline, Lagoarde-Segot, Thomas
Format: Article
Language:English
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Summary:This 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.
ISSN:0378-4266
1872-6372
DOI:10.1016/j.jbankfin.2010.11.011