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Impact of Financialization and Financial Development on Inequality: Panel Cointegration Results Using OECD Data

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  • Hochul Shin

    (Center for Distributive Justice Seoul National University Gwanak-ro 1, Gwanak-gu Seoul, Korea)

  • Keun Lee

    (Department of Economics Seoul National University Gwanak-ro 1, Gwanak-gu, Seoul, Korea)

Abstract

This study compares the long-run impact of financialization and financial development on inequality through the panel cointegration approach using OECD country data. Results show that financialization, especially high-dividend tendency in non-financial corporations, is one of the causes of rising inequality measured as the share of the top 10 percent richest. Other measures of financialization, such as the increasing size of the financial sector and financial globalization, are not robustly linked to inequality. In addition, the argument that financial development reduces inequality by relaxing the credit constraints of the poor is not supported, and no evidence shows that financial development aggravates inequality. Further, the impact of skills-biased technological change is not a robust variable in explaining inequality. A policy implication is that a simple focus on financial development is not enough to reduce inequality. Government policies are necessary, including differentiated taxation on dividends and reinvestments, which induce non-financial firms to focus on productive reinvestments from profits and discourage high dividends for shareholders.

Suggested Citation

  • Hochul Shin & Keun Lee, 2019. "Impact of Financialization and Financial Development on Inequality: Panel Cointegration Results Using OECD Data," Asian Economic Papers, MIT Press, vol. 18(1), pages 69-90, Winter/Sp.
    • Handle: RePEc:tpr:asiaec:v:18:y:2019:i:1:p:69-90
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