Working Paper: CEPR ID: DP13330
Authors: Michael Brei; Giovanni Ferri; Leonardo Gambacorta
Abstract: This paper empirically investigates the link between financial structure and income inequality. Using data for a panel of 97 economies over the period 1989-2012, we find that the relationship is not monotonic. Up to a point, more finance reduces income inequality. Beyond that point, inequality rises if finance is expanded via market-based financing, while it does not when finance grows via bank lending. These findings concur with a well-established literature indicating that deeper financial systems help reduce poverty and inequality in developing countries, but also with recent evidence of rising inequality in various financially advanced economies.
Keywords: inequality; finance; banks; financial markets
JEL Codes: G10; G21; O15; D63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Financial Development (O16) | Income Inequality (D31) |
| Income Inequality (D31) | Financial Development (O16) |
| Financial Development (up to threshold) (O16) | Income Inequality (D31) |
| Financial Development (beyond threshold) (O16) | Income Inequality (D31) |
| Market-based Finance (G19) | Income Inequality (D31) |
| Bank Financing (G21) | Income Inequality (D31) |
| Financial Structure (G32) | Income Inequality (D31) |