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The effect of financial development on income inequality in Turkey: An estimate of the Greenwood-Jovanovic hypothesis

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  • Koçak Emrah

    (Erciyes University, Faculty of Economics and Administrative Sciences, Department of Economics, Kayseri, Turkey)

  • Uzay Nısfet

    (Erciyes University, Faculty of Economics and Administrative Sciences, Department of Economics, Kayseri, Turkey)

Abstract

This paper is the first to examine the linear and nonlinear effect of financial development on income inequality in Turkey over the period of 1980-2013. Financial development is represented by disaggregated and aggregated indicators. In this way, the effects of various financial indicators on income inequality are explained. Maki (2012) structural breaks co-integration test, and Stock and Watson (1993) dynamic ordinary least squares (DOLS) methods are followed for empirical analysis. Finally, the fully modified least squares (FM-OLS) regression analysis method developed by Philips and Hansen (1990) is used for robustness check. The estimation results of the linear relationship indicate that financial development is a mitigating effect on income inequality. These results support the inequality-narrowing hypothesis. The non-linear relationship results show that financial development first increases income inequality but after financial development reaches a certain level, this effect is reversed and financial development reduces income inequality. These results support the Greenwood-Jovanovic hypothesis. All the results strongly suggest that financial development is a mitigating or improving effect on income inequality over the long-run.

Suggested Citation

  • 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.
    • Handle: RePEc:vrs:reoecp:v:19:y:2019:i:4:p:319-344:n:5
    DOI: 10.2478/revecp-2019-0017
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