Rethinking the Income Inequality and Financial Development Nexus. A Study of Nine OECD Countries
2. Theoretical Discussion and Empirical Evidence
2.1. Financial Depth (Credit Provision) and Income Inequality.
2.2. Financial Depth (Capital Markets) and Income Inequality
2.3. Financial System’s Resilience and Income Inequality
3. Data and Estimation Method
3.1. Sample, Source of Information, and Variables
- Ln GDP per capita (LnGDP pc). This variable is included to test whether the Kuznets hypothesis holds within the group of advanced economies. This hypothesis suggests that the relationship between economic development and income inequality follows an inverted U-shape.
- Public expenditure on health (GEXHEALTH). Equality of opportunity refers to the access to basic health services and the public investments in human assets, such as health, that may augment the productivity of a country and enhance the earnings capacity of its population .
- Country classification (COUNCLASS). The model of capitalism that characterizes a specific country might affect the level and the dynamics of inequality [78,79]. From the perspective of the varieties of capitalism proposed by Hall & Soskice , capitalist countries can be divided into LMEs and coordinated market economies (CME). LMEs provide stronger shareholder and creditor protection, so they usually promote a market-based model, and the repeated interaction of banks can compensate for reduced creditor protection .
- Banking crisis time (CRISTIME). This is a dummy variable. Following the definition of the World Bank, a banking crisis occurs if the following two criteria are observed: a) significant signs of financial distress in the banking system and b) significant banking policy intervention. The first year in which both criteria are met is considered the start of the crisis (2008), and the crisis ends when both real GDP growth and real credit growth turn positive for two consecutive years.
5. Discussion and Conclusions
Conflicts of Interest
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|Reference||Objective and Sample||Methodology||Results|
|||They analyzed the impact of financial globalization and technological changes in income inequality.|
Sample: 51 countries, of which 20 are advanced and 31 are developing and emerging countries, and the period covered is 1981–2003.
|Panel demeaned with time dummies.||(+) effect|
|||Theoretical model of market imperfections and indivisibilities in investment in human capital affect “initial distribution of wealth,” which affects “aggregate output” and “investment.”||Economic growth equilibrium model (short and long term).||(-) effect|
|||Financial markets revolution opens the access of the poor everywhere.|
Sample: Wide sample of countries around the world (1960–1995).
|Regression (pure cross-sectional analysis; for long-term relationships) and panel data (to test the U-shaped hypothesis) in 5 non overlapping periods.||(-) effect|
|||Analyzes the impact of financial depth in the distribution of income and changes in both relative and absolute poverty.|
Sample: 72 developed and developing countries.
|Ordinary Least Squares (OLS) method; cross-country regressions.||(-) effect|
|||Analyzes the link of savings, economic growth, financial intermediation, and income inequality.|
They test the Kuznets
|Theoretical model of general equilibrium yields a development process consistent.||(+/-) effect|
An inverted U-shaped relationship between financial development and income inequality.
|||Explores a potential dynamic and endogenous relationship between financial sector development and inequality.|
Sample: developed and developing countries (1962–2006).
|Dynamic multivariate panel data analysis. Generalized method of moments. Instrumental variable approach (lagged dependent).||(+/-) effect|
An inverted U-curve relationship.
The turning point occurs at the point where the credit to the private sector reaches 114% of GDP.
|||Analyzes the relationship between financial depth and gross and net income inequality in a cross-country setting.|
Sample: 1960–2005 for 72 countries.
|||Financial depth increases income inequality (especially in developed countries).|
Sample: 138 countries for the period 1960–2008.
|Panel data analysis. Fixed effects, time dummies.|
Instrumental variable procedure.
|||How financial depth is related to income distribution.|
Sample: 22 African countries (1990–2004).
|Dynamic panel estimation technique (GMM). They used GMM-estimator of Blundell and Bond (1998).||Mixed results.|
|||Financial depth reduces inequality until a point, and then inequality increases (the impact of financial markets).|
Sample: 35 developing countries (1980–2000).
|Dynamic panel models (linear and non-linear) using the two-step GMM estimator provided by Arellano and Bond and a non-linear equation.||(-/+) effect|
U- shaped relationship.
|Net Gini (GINI)||Net Gini Coefficient (Post-Tax, Post-Transfer)|
Source: Standardized World Income Inequality Database (SWIID) 
|Private credit by deposit banks and other financial institutions to GDP (%)|
Source: Global financial development database, World Bank .
|H1.a: Credit provision has a negative and significant impact on income inequality.||Negative|
|H1.b: Credit provision has a positive and significant impact on income inequality.||Positive|
|H1.c: There is an inverted U-shaped relationship between credit provision and income inequality.||Linear term positive and quadratic term negative.|
|H1.d: There is a U-shaped relationship between credit provision and income inequality.||Linear term negative and quadratic term positive.|
|Financial market capitalization|
|Stock market capitalization to GDP (%)|
Source: Global financial development database,  and Fed Reserve Bank of St. Louis.
|H2a: Financial market capitalization has a positive and significant impact on income inequality.||Positive|
|H2b: There is a nonlinear relationship between financial market capitalization and income inequality.||Quadratic term.|
|Financial system’s resilience|
|Composite Index of Resilience|
Source:  and own elaboration.
|H3: Financial system’s resilience has a negative and significant impact on income inequality.||Negative|
|Ln GDP per capita (Ln GDP pc)||Neperian logarithm of GDP per capita, constant 2010 US$||World Development Indicators database, World Bank |
|Public expenditure on health (GEXHEALTH)||Government’s current expenditure on health to GDP (%)||OECD statistics .|
|Country classification (COUNCLASS)||Classification of liberal market economies (LME) and coordinated market economies (CME).||Hall and Soskice .|
|Banking crisis time (CRISTIME)||Dummy variable (0 for years before 2008; 1 for 2008 and the following years)||Global Financial Indicators, World Bank .|
|Factor Loadings after Varimax Rotation|
|Banking system size||0.908||0.284||0.105|
|Broad non-core liabilities||0.707||0.046||–0.162|
|Cumulated variance (%)||35.998||54.235||75.159|
|Dependent variable: GINI_COEFFICIENT||Two-step GMM Estimator|
|Explanatory Variables (Lagged one Period)||Coefficient/(Standard Error)|
|CRISTIME (0≤2008; 1>2008)||1.049639 ***|
© 2020 by the authors. Licensee MDPI, Basel, Switzerland. This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license (http://creativecommons.org/licenses/by/4.0/).
de la Cuesta-González, M.; Ruza, C.; Rodríguez-Fernández, J.M. Rethinking the Income Inequality and Financial Development Nexus. A Study of Nine OECD Countries. Sustainability 2020, 12, 5449. https://doi.org/10.3390/su12135449
de la Cuesta-González M, Ruza C, Rodríguez-Fernández JM. Rethinking the Income Inequality and Financial Development Nexus. A Study of Nine OECD Countries. Sustainability. 2020; 12(13):5449. https://doi.org/10.3390/su12135449Chicago/Turabian Style
de la Cuesta-González, Marta, Cristina Ruza, and José M. Rodríguez-Fernández. 2020. "Rethinking the Income Inequality and Financial Development Nexus. A Study of Nine OECD Countries" Sustainability 12, no. 13: 5449. https://doi.org/10.3390/su12135449