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Title: Income Inequality Effects of Overall Financial Development, Access, and Depth
Abstract: The connection between income inequality and financial sector development (FSD) has been extensively studied in the literature. However, a depth measure of FSD is used in the majority of these studies. According to this study, various FSD elements have a varied effect on income inequality. The first empirical test in this study looks at how FSD affects income inequality generally. The impact of financial sector development dimensions (depth and access) on income inequality is then examined, both linearly and nonlinearly. The study’s novelty lies in comparing the impact of financial sector depth (growth in domestic credit) on inequality with the impact of financial access data on income inequality, such as ATM per adult and financial access index. Furthermore, fewer studies have examined the overall effects of FSD. The study uses panel data from 120 countries from 2004 to 2019 and the General Method of Moments (GMM) system to solve the endogenous problem. The study came to three different conclusions. First, the research reveals that the market development index, individual financial institution index, and overall FSD index all reduce income inequality. The study also reveals that different aspects of FSD have diverse effects on income inequality, with increased access to financial services reducing it in both linear and nonlinear models. While the linear model shows that financial sector depth reduces income inequality, the nonlinear model shows that the Too Much Finance hypothesis is true because the results support a U-shaped relationship between financial sector depth and income inequality. For decisions on financial reforms and income distribution, these findings are crucial. These findings suggest that by enhancing credit access and enacting credit policy provisions, financial sector reforms can be shaped to lower income inequality.
Keywords: income inequality; financial sector development; GMM
Paper Quality: SCOPUS / Web of Science Level Research Paper
Subject: Economics
Writer Experience: 20+ Years
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