Two Essays on the Relationship Between Financial Development and Income Distribution

Abstract

This dissertation consists of two chapters on the relation between financial development, income inequality and poverty. The first chapter examines the relationship between financial deepening and income inequality for 16 countries based on a time series approach. Unlike previous work that focuses on testing the credit channel (private credit and bank asset) through which finance improves inequality, this chapter also investigates the deposit channel (liquid liabilities and bank deposit). The results suggest that the finance-inequality relationships behave differently across countries. Five countries support the reducing-inequality function through the credit channel, whereas three countries are found to support the deposit channel. In India, Japan, Bolivia, Malta and the United States, financial deepening is actually harming the income distribution. By implementing instrumental variable regressions on a sample of 144 countries from 1961 to 2011, the second chapter extends the examination from financial deepening to multiple dimensions of financial development--financial access, efficiency, stability and openness. Evidence shows that, except for financial openness, the development of the financial system can significantly improve the income inequality and poverty in an economy.