DP13330 Financial structure and income inequality

Author(s): Michael Brei, Giovanni Ferri, Leonardo Gambacorta
Publication Date: November 2018
Keyword(s): banks, Finance, financial markets, inequality
JEL(s): D63, G10, G21, O15
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13330

This paper empirically investigates the link between financial structure and income inequality. Using data for a panel of 97 economies over the period 1989-2012, we find that the relationship is not monotonic. Up to a point, more finance reduces income inequality. Beyond that point, inequality rises if finance is expanded via market-based financing, while it does not when finance grows via bank lending. These findings concur with a well-established literature indicating that deeper financial systems help reduce poverty and inequality in developing countries, but also with recent evidence of rising inequality in various financially advanced economies.