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Investigation of Parabolic Relationship Between Financial Development and Income Inequality using U Test: Analysis of Financial Curve in Türkiye

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  • Nimet Melis Esenyel İçen

    (İstanbul Üniversitesi, İktisat Fakültesi, Ekonometri Bölümü, İstanbul, Türkiye)

Abstract

This study investigates the relationship between income inequality and financial development within the framework of the financial Kuznets hypothesis. The aim of this study is to determine the effects of financial development, inflation, and per capita income variables on income inequality using annual data from Turkiye for the period 1987-2021. The share of domestic credits to the private sector provided by banks in gross domestic product is considered as a measure of financial development. The Gini coefficient is used as an indicator of income inequality. To examine the long-term relationships between variables, the ARDL Bounds test developed by Pesaran, Shin, and Smith (2001) is conducted. According to the ARDL Bounds test, it is concluded that there is a long-run relationship exists among the variables. In the estimated long-run model, when examining the signs and statistical significance of the coefficients of the financial development variable and its square, it is found that there is initially a U-shaped relationship. However, this assessment is inadequate and may lead to misleading results. Therefore, a three-step model evaluation method is employed. First, attention should be paid to the signs and statistical significance of the coefficients of the financial development variable and its square. In the second step, it is checked whether the turning point of the parabola is within the data range. Finally, the slope at the smallest and largest values of the parabola should be sufficiently steep. According to the U test conducted to verify this condition, we conclude that the U-shaped model is valid.

Suggested Citation

  • Nimet Melis Esenyel İçen, 2024. "Investigation of Parabolic Relationship Between Financial Development and Income Inequality using U Test: Analysis of Financial Curve in Türkiye," Journal of Economic Policy Researches, Istanbul University, Faculty of Economics, vol. 11(2), pages 355-369, July.
    • Handle: RePEc:ist:iujepr:v:11:y:2024:i:2:p:355-369
    DOI: 10.26650/JEPR1490883
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    References listed on IDEAS

    as
    1. Murat Cetin & Harun Demir & Selin Saygin, 2021. "Financial Development, Technological Innovation and Income Inequality: Time Series Evidence from Turkey," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 156(1), pages 47-69, July.
    2. Koçak Emrah & Uzay Nısfet, 2019. "The effect of financial development on income inequality in Turkey: An estimate of the Greenwood-Jovanovic hypothesis," Review of Economic Perspectives, Sciendo, vol. 19(4), pages 319-344, December.
    3. Oded Galor & Joseph Zeira, 1993. "Income Distribution and Macroeconomics," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 60(1), pages 35-52.
    4. Grossman, G.M & Krueger, A.B., 1991. "Environmental Impacts of a North American Free Trade Agreement," Papers 158, Princeton, Woodrow Wilson School - Public and International Affairs.
    5. M. Hashem Pesaran & Yongcheol Shin & Richard J. Smith, 2001. "Bounds testing approaches to the analysis of level relationships," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(3), pages 289-326.
    6. Richard F. J. Haans & Constant Pieters & Zi-Lin He, 2016. "Thinking about U: Theorizing and testing U- and inverted U-shaped relationships in strategy research," Strategic Management Journal, Wiley Blackwell, vol. 37(7), pages 1177-1195, July.
    7. Canavire Bacarreza, Gustavo J. & Rioja, Felix, 2008. "Financial Development and the Distribution of Income in Latin America and the Caribbean," IZA Discussion Papers 3796, Institute of Labor Economics (IZA).
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Financial kuznets hypothesis; Income inequality; ARDL bounds test; Cointegration JEL Classification : C12 ; C32 ; E10;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General

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