Does income inequality respond asymmetrically to financial development? Evidence from India using asymmetric cointegration and causality tests

Abstract

Using NARDL model and Hatemi-j-asymmetric causality test, this work scrutinizes the asymmetric interactions between income inequality and financial development in India. The empirical findings support the existence of asymmetric structures in the finance-inequality nexus. It is found that negative shocks in financial development ameliorate income inequality while as, positive shocks in financial development exacerbate income inequality in an asymmetric manner. Wald's test and asymmetric cumulative dynamic multipliers used in the study also lend credence to the presence of asymmetric structures in the finance-inequality relationship demonstrating the robustness of our estimates. Furthermore, asymmetric causality tests reveal a unidirectional asymmetric causality between positive shocks in financial development and income inequality. The study divulges need to account for asymmetry in finance–inequality which previous studies neglected. National strategies for financial education, financial inclusion for unbanked segments of the population by expanding financial services network to hitherto unbanked areas, tailoring of financial products and services as per the specific needs of people, reducing interest rates on loans to businesses that qualify as small and medium enterprises must be among the top priorities of policy makers.