Does Financial Development Relieve or Exacerbate Income Inequality? A Quantile Regression Approach

This paper probes deeper into the finance-inequality nexus to explore whether the impact of the multi-dimensional aspects of financial development on income inequality varies across countries at different stages of the inequality spectrum. Using an instrumental variable quantile regressions approach for a panel dataset of 91 countries from 1980 to 2014, the findings suggest that the impact of financial development in terms of banking and stock market development on income inequality for countries at the higher end of the inequality spectrum differs from those with lower or moderate inequality levels. Furthermore, the variation observed in the magnitude of the impact at different quantiles of the conditional distribution of income inequality depends on the specific measure used to capture a different aspect of financial development, i.e., depth, efficiency and stability of banking sector and stock market development. The results are robust to several alternative specifications and have important policy implications for countries with different inequality levels.