Abstract
Although recently the research on the relationship between financial instability and income inequality got deep interest, there is little study. This paper analyses the relationship between financial instability and income inequality. The Financial Stability Index (FSI) and the Financial Vulnerability Index (FVI) are used as the measure of financial instability and the income quintile share ratio is used to measure income inequality. As the result of empirical studies, the deterioration in FCI results in an increase in income inequality whreas the worsening in FVI appears not to have an impact on income inequality contemporaneously. This result is similar in the case of the GMM estimation which considers endoneous issues due to reverse causality. In the robust analysis where sufficient lags are incorporated into the FSI and the FVI, both variables appear to increase income ineqauity. We interpret that this result is because the FSI reflects current financial instability while the FVI takes into future inancial instability in terms of mid- and long-term. This result implies that the macro-prudential policy or the policy for financial stability can be useful for improving income inequality
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