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Nonlinear dynamics of the finance-inequality nexus in developing countries

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  • Hui-Boon Tan
  • Siong-Hook Law

Abstract

This study examines the dynamics of the finance-inequality nexus in 35 developing countries during the past two decades, using two data sets of income inequality: the University of Texas Inequality Project (UTIP) and the Standardized World Income Inequality Database (SWIID). The empirical results of this study, based on the dynamic panel models, provide new evidence that highlights the nonlinear U-shaped relationship between financial deepening and income distribution. It implies the narrowing of the income-inequality gap at the early stage of financial development of the countries. This improvement, however, will only be sustainable dynamically below a certain threshold level. Further deepening above that level will lead to a reverse effect, which deteriorates income inequality. This reflects the inefficiency of financial markets in improving economic inequality when the threshold level is overshot. Copyright Springer Science+Business Media, LLC. 2012

Suggested Citation

  • Hui-Boon Tan & Siong-Hook Law, 2012. "Nonlinear dynamics of the finance-inequality nexus in developing countries," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 10(4), pages 551-563, December.
    • Handle: RePEc:kap:jecinq:v:10:y:2012:i:4:p:551-563
    DOI: 10.1007/s10888-011-9174-3
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    More about this item

    Keywords

    Financial deepening; Income inequality; Gini coefficient; Dynamic panel analysis; E0; G0; O15;
    All these keywords.

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • G0 - Financial Economics - - General
    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration

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