How do banking crises impact on income inequality?

Abstract

We show that banking crises have an important effect on income distribution: inequality increases before banking crisis episodes and sharply declines afterwards. We also find that, while a large government size does not per se seem to reduce inequality, a rise in financial depth (i.e. better access to credit provided by the banking sector) contributes to a more equal distribution of income.

Keywords:

• inequality
• banking crisis
• financial depth
• government size

JEL Classification:

• E25
• E44
• H12
• G18

Notes

¹ Other authors look at the impact of foreign direct investment (Choi, 2006) or globalization (Lee, 2010) on inequality.

² See Solt (2009).