Is there a nonlinear relationship between financial development and income inequality in Africa? Evidence from dynamic panel threshold

Abstract

Using dynamic panel threshold model, this work examines the nonlinear relationship between financial development and inequality in Africa. The study introduces a robust measure of financial development into the literature. Using 40 African countries selected from high-income, middle-low and low-income countries, the study tests the new financial development indicator. The empirical results validate the existence of threshold levels of financial development that addresses inequality among African countries. Aggregately, financial development tends to promote inequality in high-income countries and reduces the same in low and middle-income countries. Hence, policymakers, in African countries, should be aware of the threshold level of financial development that imparts income inequality. Also, for financial development to have an enormous impact on inequality, all financial development pillars of depth, stability, access and efficiency must be simultaneously accorded a due place in policymaking by practitioners.