Does the impact of financial liberalization on income inequality depend on financial development? Some new evidence

ABSTRACT

Instead of empirically finding that higher levels of financial development reduce the positive impact of financial liberalization on inequality, as others do, we come up with the opposite result: financial development strengthens the inequality-raising impact of financial liberalization. We suggest that by, e.g., allowing financial liberalization to lead to more volatility and uncertainty, the model of Bumann and Lensink (2016 “Capital Account Liberalization and Income Inequality.“ Journal of International Money and Finance 61: 143–162.) can be extended as such that also an amplifying instead of reducing effect of financial depth on the impact of financial liberalization on income inequality can be theoretically justified.

KEYWORDS:

• Financial liberalization
• financial development
• income inequality

JEL CLASSIFICATION:

• D31
• F02
• O11
• O15

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Corrigendum

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Bumann and Lensink (2016) claim that a sufficiently high level of financial depth, measured by private credit over GDP, exceeds 25%.

² We use 5-year nonoverlapping averages for several reasons (de Haan and Sturm 2017). First, annual macroeconomic data are noisy, and this applies especially for data on income inequality. Second, the annual income inequality data in Standardized World Income Inequality Database are imputed for years for which no information was available in the underlying databases (there are only infrequent measures of inequality for much of Africa, Latin America and Asia). Third, we are not so much interested in short-term-driven, i.e. business cycle, effects.

³ As a robustness check, we have also added several control variables. Most of the control variables considered are not significant. Only a dummy variable indicating whether a systemic banking crisis started in the preceding 5-year period, an index measuring civil liberties, and the degree of political globalization turn out to be significant for both measures of financial liberalization. Adding controls, however, does not change our conclusions and are therefore not shown. These results are available upon request.