A closer look at financial development and income distribution

Céline Gimet (1) , Thomas Lagoarde-Segot (2, 3)

1 GATE Lyon Saint-Étienne - Groupe d'Analyse et de Théorie Economique Lyon - Saint-Etienne
2 DEFI - Centre de recherche en développement économique et finance internationale
3 Euromed Marseille - École de management

This paper analyzes the under-investigated relationship uniting financial development and income distribution. We use a novel approach taking into account for the first time the specific channels linking banks, capital markets and income inequality, the time-varying nature of the relationship, and reciprocal causality. We construct a set of annual indicators of banking and capital market size, robustness, efficiency and international integration. We then estimate the determinants of income distribution using a panel Bayesian structural vector autoregressive (SVAR) model, for a set of 49 countries over the 1994-2002 period. We uncover a significant causality running from financial sector development to income distribution. In addition, the banking sector seems to exert a stronger impact on inequality. Finally, the relationship appears to depend on characteristics of the financial sector, rather than on its size.

Mots clés: finance; income distribution; SVAR

Domaines: Economies et finances

Céline Gimet, Thomas Lagoarde-Segot. A closer look at financial development and income distribution. Journal of Banking and Finance, 2011, 35 (7), pp.1698-1713. ⟨10.1016/j.jbankfin.2010.11.011⟩. ⟨halshs-00564641⟩