Income Inequality and Financial Disturbances: Does Income Inequality Engender Financial Crises?

Abstract

This paper is an empirical study that used econometric techniques to analyze the causal relationship between income inequality and financial disturbances in developed economies. The author used annual data from panels of OECD countries. In this study, income distribution is represented by the share of GDP that accrued to the top 10 percent earners, wage share of GDP, and disposable income Gini Coefficient in annual data series. The test included three channels, through which income inequality may affect the financial system. The results suggest that the effect of income inequality on the national financial stability is ambiguous, as the study concluded that this effect is radically different according to the channel tested. The study found that a rise in income inequality has a negative impact on public finance, but it has a positive effect on the private debt market, and on the external balance from a financial stability standpoint.