The non-linear impact of financial development on income inequality: evidence from dynamic panel threshold model

Abstract

PurposeThis study examines the non-linear impact of financial development on income inequality and analyses the mediators through which financial development affects income inequality.Design/methodology/approachThe study uses a dynamic panel threshold method with an endogeneous threshold variable on a comprehensive sample of 85 countries over the period of 1996-2015.FindingsThe author finds that financial development activities increase income inequality in developed countries. However, financial development promotes income equality in developing countries. Further, the study finds that education and institutional quality are the channels through which financial development has non-linear impacts on income inequality.Originality/valueThe study explores relatively new method to examine the nonlinear impact of financial development and also considers new dataset for the main explanatory variable.