Financial development and income inequality: a panel data approach

We analyzed the link between financial development and income inequality for a broad unbalanced dataset of up to 138 developed and developing countries over the years 1960-2008. Using credit to GDP as a measure of financial development, our results reject theoretical models predicting a negative impact of financial development on income inequality measured by the Gini coefficient. Controlling for country fixed effects, possible endogeneity problems, GDP per capita and other control variables, we find that financial development increases income inequality. These results are robust to different measures of financial development, econometric specifications and control variables.