Essays on Financial Development and Income Inequality

Abstract

This thesis aims to systematically unpack the relationship between financial development and income inequality using a broad panel dataset of up to 151 developed and developing countries for the period 1980 to 2014. The first empirical chapter (Chapter 4) investigates whether the finance-inequality nexus depends on the specific measure used to capture the multidimensional aspects of financial development – such as access, depth, efficiency, and stability – related to banking systems and stock markets. Using a series of panel data techniques with various robustness checks, one of the significant findings to emerge from this study is that while some aspects of financial development contribute towards alleviating income inequality, others may have a reverse impact. To further unpack the finance-inequality nexus, the second empirical chapter (Chapter 5) probes beyond the mean effects to explore whether the effect of financial development on income inequality varies according to the level of inequality. For this purpose, a quantile regressions technique is adopted to ascertain the full distributional impact of financial development pertaining to not only the centre but also the upper and lower ends of the inequality spectrum. The results reveal that different aspects of financial development may not yield the same effect for countries with higher inequality levels compared to countries with lower inequality. Furthermore, these findings shed meaningful light on which aspects of banking systems and stock markets aggravate or alleviate income inequality in the context of countries with high-, moderate- or low-income inequality, thereby aiding policymakers to devise and implement effectual policy decisions. Finally, the third empirical chapter (Chapter 6) aims to unfold whether the relationship between financial development and inequality is contingent on the degree of financial development. While existing theory suggests that the impact of financial development on inequality may depend on the stage of financial development that the country is undergoing (Greenwood and Jovanovic, 1990; Aghion and Bolton, 1997), the empirical studies on such regime-shifting effects have remained relatively scant. This chapter, therefore, investigates the implications of financial regimes in exerting a differential impact on income distribution. To this end, a panel threshold regression approach is employed, which allows the detection and inferential analyses of possible threshold effects and regime shifts in economic relationships. The key finding is that the finance-inequality nexus is indeed contingent on the distinct level or regime of financial development. Therefore, the findings of this thesis collectively provide several critical insights on the finance-inequality nexus. The important lesson to be learned is that researchers should not simply rely on a narrow definition of financial development to ascertain the impact on income inequality. At the same time, policymakers need to be more cautious in their approach towards effectively targeting and promoting the inequality-reducing aspects of financial development in the context of countries with different inequality levels and financial regimes.

Date of Award	31 Dec 2021
Original language	English
Awarding Institution	The University of Manchester
Supervisor	Osman Ouattara (Supervisor) & Antonio Savoia (Supervisor)