Financial Development, Technological Innovation and Income Inequality: Time Series Evidence from Turkey

Abstract

The main aim of the study is to analyze the link between technological innovation and income inequality for Turkey in terms of financial Kuznets curve (FKC) hypothesis. The study uses time-series data from 1987 to 2018. We employ the Hatemi-J cointegration, ARDL bounds test and VECM Granger causality techniques to investigate the relations between the variables. We also employ the DOLS, FMOLS and CCR approaches to estimate the long-run parameters. The results reveal that the series are cointegrated under the structural breaks. The results also reveal that the FKC is valid for Turkish economy in the long run. Technological innovation positively affects income inequality while economic growth is negatively linked with income inequality. There exists a bi-directional causal linkage between financial development and income inequality. Technological innovation and income inequality cause each other. In addition, economic growth causes income inequality. Empirical results suggest a twofold policy implication: i) improvement of the financial system and ii) to eliminate the adverse effects of technological innovations on income distribution.