Financial development and income inequality: Direct and indirect transmission mechanisms in Sub-Saharan Africa

Abstract

The reduction of income inequality between poor and rich constitutes one of the goals of governments and policymakers across the world. Financial development remains one way to cope with income inequality but its influence on income inequality is mixed. Thus, this paper explores the direct and indirect transmission mechanisms through which financial development can affect income inequality in Sub-Saharan Africa (SSA). The study utilises data from the Standardised World Income Inequality Database (SWIID) for income inequality and World Development Indicators (WDI) for financial development over the period 1995 to 2015. Analysing the data using the System Generalised Method of Moments (SGMM), the results show that financial development solely increases income inequality but its interaction with GDP per capita has a negative and significant effect on income inequality. These findings suggest that the financial development need a good economic growth to reduce income inequality.