Nonlinear Effect of Financial Development on Income Inequality: The Case of Ivory Coast

From the mid-1980s until the 1990s, many developing countries, particularly the countries of the West African Economic and Monetary Union, undertook major reforms of their financial systems in order to free them from numerous internal constraints that limited their development, such as interest rate ceilings, high reserve requirements, administrative credit allocations, etc. This financial liberalisation will promote rapid financial development in these countries. Thus, in most of these countries, there is a relative deepening of the financial sector and an improvement in financial policies. The economic and financial literature suggests that a well-functioning financial system can promote the accumulation of physical capital, improve economic conditions and thus promote long-term growth (Demetrides and Andrinova, 2004), and thus reduce inequality between rich and poor (Anand & Segal, 2017). However, studies conducted so far indicate that the effects of financial development on income inequality remain mixed. Thus, the objective of this study is to analyse the effect of financial development on the reduction of income inequality in Côte d'Ivoire. To do so, we used annual data from the World Bank (2018) and the IMF (2018) covering the period 1986-2016. From the estimation of the ARDL and NARDL models, the results show that financial development reduces income inequality in the short run. However, in the long run financial development increases income inequality in Côte d'Ivoire. The results also show that financial development has an asymmetric effect on income inequality in the short and long run in Côte d'Ivoire.