Financial Kuznets Research Articles

Rethinking the financial Kuznets curve in the framework of income inequality: Empirical evidence on advanced and developing economies

Contrary to the empirical findings that there is a negative link between financial sector development and income inequality, we introduce a different result: in the earlier stages of the financial and economic development, the level of income inequality decreases, but with an ongoing developmental process, the later stages show that the above-mentioned link between finance and inequality turns into positive within the framework of financial Kuznets curve. In terms of finance-inequality nexus, we find that neither markets nor institutions play a significant role for the decrease in income inequality. When the results are measured within this context, the study concludes that the U-shaped financial Kuznets curve hypothesis is valid in the sample countries.

Financial Market Development and Income Distribution Inequality in the Emerging Markets

The disruptive effects of the subprime financial crisis have raised new global concerns toward the increasing income distribution inequality. Nowadays, it has become one of the mainstays of public and scientific discourse around the world. Theoretical financial Kuznets curve suggests that the relationship between financial market development and income distribution inequality follows an inverted U-shaped pattern. However, current literature failed to support this hypothesis. The expansion of the financial market truly provides more relative opportunities for the poor which benefits the equalization. But those advantage opportunities are likely to be captured by some specific groups instead of all population. The majority literature on this academic field focus on developed countries with cross-sectional and panel data analysis that providing controversial results. They emphasize the financial development as a consequence of economic growth without deep analysis of the financial market development as an independent entity in determining the inequality. This study proposes to use a more comprehensive and rigorous method to identify the direct relationship between financial market development and income distribution inequality in 10 most typical emerging markets. Both short-run and long-run impacts of financial market development on income distribution inequality are examined and defined by utilizing time-series data and error-correction modelling technique. By providing a better understanding of the relationship, the findings of the research would make contributions to financial market policy adjustments in developing countries.

Financial Kuznets Curve and the Role of the Governance of the Financial Supervision in OECD

Financial Kuznets Curve and the Role of the Governance of the Financial Supervision in OECD

Is financial development narrowing the urban–rural income gap? A cross‐regional study of China

AbstractThis paper investigates the causal relationship between financial development and the urban–rural income gap in China. Using a bootstrap Granger panel causality analysis, the result indicates that financial development influences urban–rural income gap mainly in Eastern China. The high level of financial development in this region enables rural areas to increase its income. Our results also confirm the existence of the financial Kuznets curve in Eastern China where urban–rural income gap would be first increased and afterwards decreased by financial development. The financial development itself is not dependent on urban–rural income gap as it largely depends on government policies and economic growth.

Financial sector development and income inequality in ASEAN-5 countries: does financial Kuznets curve exists?

This study investigates the influence of financial sector development on income inequality in ASEAN-5 countries, namely Indonesia, Malaysia, the Philippines, Singapore and Thailand between 1989 and 2013. We have constructed the financial development index for the selected ASEAN countries by applying the principle component method for the major four proxies of financial development available in literature, namely; domestic credit by the banking sector, domestic credit to the private sector, money supply and stock market capitalisation. Pedroni panel cointegration and Kao residual panel cointegration approaches confirm the valid long run relationship between considered variables. Results of fixed-effect model indicate that the different proxies of financial development have a positive and significant impact on income inequality in ASEAN-5 countries, while the squared term of financial development proxies have a negative and significant impact on income inequality. These findings confirm the presence of financial Kuznets hypothesis in ASEAN-5 countries during the period under the study.

Financial sector development and income inequality in ASEAN-5 countries: does financial Kuznets curve exists?

This study investigates the influence of financial sector development on income inequality in ASEAN-5 countries, namely Indonesia, Malaysia, the Philippines, Singapore and Thailand between 1989 and 2013. We have constructed the financial development index for the selected ASEAN countries by applying the principle component method for the major four proxies of financial development available in literature, namely; domestic credit by the banking sector, domestic credit to the private sector, money supply and stock market capitalisation. Pedroni panel cointegration and Kao residual panel cointegration approaches confirm the valid long run relationship between considered variables. Results of fixed-effect model indicate that the different proxies of financial development have a positive and significant impact on income inequality in ASEAN-5 countries, while the squared term of financial development proxies have a negative and significant impact on income inequality. These findings confirm the presence of financial Kuznets hypothesis in ASEAN-5 countries during the period under the study.

Does financialization retard growth? Time series and cross-sectional evidence

ABSTRACTAlthough financial development is essential for economic development, excessive financialization of the economy is believed to exert a negative effect on output growth. In this article, empirical evidence is presented on the relation between economic growth and financialization as measured by the ratio of credit to GDP and the ratio of publicly traded shares to GDP. The empirical results are based on annual time series data for six country groups as well as cross-sectional data covering a large number of countries. The model is initially specified with unobserved components and estimated in a time-varying parametric framework to account for missing variables. Thereafter, the issue of linear versus quadratic specifications is examined. The results are robust with respect to model specification, estimation method, data type and variable definition, showing in general that financialization has a negative impact on growth. Some evidence is also presented to support the notion of the financial Kuznets curve.

The financial Kuznets curve: Evidence for the euro area

Abstract The paper introduces a new specification of the Kuznets curve, where turning point per capita income is conditioned on the level of financial development. We then provide new evidence on income inequality dynamics for the euro area (EA) countries since the mid-1980s. We find evidence in favor of an EA-wide financial Kuznets curve, also resilient to the recent financial and economic crises. From a policy perspective, our findings highlight the importance of financial development in fostering not only economic growth, but also a more even distribution of income.

Financial deepening and income inequality: Is there any financial Kuznets curve in China? The political economy analysis

The interconnectedness of financial deepening and income inequality has been a highly controversial discussion which has not been concluded despite many empirical and theoretical studies up to date. One of the basic building blocks for many research designs is the reliance upon the Kuznets inverted U-shaped curve which postulates that in the first phase of economic growth income inequality increases, peaks and then decreases to a tolerable level in the later phase after a certain income level had been attained. The role of financial deepening in financing economic growth is an indispensable and necessary condition enabling us to easily draw an analogy between financial deepening and income inequality in a financial version of the Kuznets curve. In spite of 30 years of economic and financial reforms in China, which represents a fairly young history of economic growth and development, there are many indicators that Chinese experience significantly deviates from the presupposed inverted U-shaped curve trajectory and its final equalizing effect. This paper relies on financial deepening data measured by monetary aggregate M2/GDP and domestic banking credit/GDP ratios in its claim that they significantly correlate with rising income inequality. The author’s intention consists not in claiming that financial deepening per se causes income inequality, but provides a political economy analysis of the specific institutional and power configuration which leads to their positive relationship. This configuration is determined by the prevailing banking model, the hukou system, financial repression and the decentralized authoritarian system. On the other hand, the absence of inequality-narrowing institutitons further aggravate the problem. All the aforementioned factors are geared at avoiding mechanical and spurious claims that financial deepening increases or decreases income inequality across countries. A historical institutionalism approach to explain China’s path related to the Kuznets curve prediction shows the central validity of open and inclusive institutions in generating inequality-narrowing benefits of financial deepening.

Financial Deepening and Income Distribution Inequality in the Euro Area

The paper introduces a new specification of the Kuznets curve, where turning point per capita income is conditioned to the level of financial development. Within the proposed framework, it then provides new evidence on real income convergence for the euro area (EA) since the mid-1980s, with a special focus on the subprime and sovereign debt financial crises. We find strong empirical evidence in favor of an EA-wide steady-state financial Kuznets curve and of ongoing convergence across EA members toward a common per capita income turning point level. By means of a counterfactual analysis, we then detect a worsening in income inequality for all the EA countries during the financial crises, and not only for the peripheral countries, which were most strongly hit. From a policy perspective, our findings highlight the role of financial stability in fostering not only economic growth, but also to achieve a more even distribution of income.

Financial Development and Income Inequality: Is There Any Financial Kuznets Curve in Iran?

This paper deals with the investigation of the relationship between financial development and income inequality in case of Iran. In doing so, we have applied the ARDL bounds testing approach to examine the long-run relationship in the presence of structural break in the series. The unit root properties have been tested by applying Zivot and Andrews (in J Bus Econ Stat 10:251–270, 1992) and Clemente et al. (in Econ Lett 59, 175–182, 1998) structural break tests. The VECM Granger causality approach is used to detect the direction of the causal relationship between financial development and income inequality. Moreover, Greenwood–Jovanovich (GJ) hypothesis has also been tested for Iranian economy. Our results confirm the long run relationship between the variables. Furthermore, financial development reduces income inequality. Economic growth worsens income inequality, but inflation and globalization improve income distribution. Finally, GJ hypothesis is found as well as U-shaped relationship between globalization and income inequality in case of Iran. This study might provide new insights for policy makers to reduce income inequality by making economic growth more fruitful for poor segment of population and directing financial sector to provide access to financial resources of poor individuals at cheaper cost.

Financial Sector Development and Income Inequality: Is There a Financial Kuznets Curve?

The existing empirical knowledge in the area of financial sector development and income inequality finds evidence for the theoretical work of Banerjee and Newman (1993) and Galor and Zeira (1993) who posit a simple, linear relationship between the two variables. In this paper, we subject the extant empirical knowledge to close scrutiny and point out to a potential dynamic and endogenous relationship between financial sector development and inequality. By using dynamic multivariate panel data analysis on a carefully selected dataset of income inequality data for developed and developing countries spanning the period 1962-2006, we find robust empirical evidence for the existence of an inverted U-curve relationship between financial sector development and income inequality. The results are robust to inclusion of different control variables and different lag structure in the estimation method. In that token, we confirm the theoretical stipulations of Greenwood and Jovanovic (1990) for an inverted U-curve relationship between the financial sector and income inequality.