Financial Development and Income Inequality: The Case of Ecuador

Abstract

Financial development, characterized by the growth and sophistication of the financial system, is crucial for the global economy, since it facilitates investment, savings and the efficient allocation of resources, in addition to contributing to the reduction of poverty and inequality by allowing, broader access to financial services. Ecuador has experienced significant changes in its financial system during recent decades, such as dollarization, liberalization, digitalization, diversification of services, and strengthening of regulation and supervision. The research focuses on establishing the influence of financial development on income inequality. The autoregressive distribution of lags (ARDL) methodology was used with the purpose of identifying short- and long-term relationships. The variables included are the Gini index, financial development, financial instability, public social spending, and final consumption spending by resident households, trade openness and gross fixed capital formation. After applying the ARDL model, the main results show that credit allocation to the private sector plays a significant role in reducing income inequality, and its effect intensifies over time. Received: 22 October 2023 / Accepted: 9 April 2024 / Published: 5 May 2024