Finance and income inequality in OECD countries

Using data from OECD countries over the past three decades, this paper shows that financial expansion has fuelled greater income inequality. Higher levels of credit intermediation and stock markets are both related with a more unequal distribution of income. Greater income inequality may not reduce the welfare of even the lowest earners so long as their income growth is not negatively affected. Numerical simulations based on a novel empirical methodology indicate, however, that the financial expansion has put a brake on the income growth of many low- and middle-income households. No evidence is found that financial crises explain the observed relationships. While causality is difficult to establish beyond doubt, the paper finds credit patterns which are inconsistent with reverse causality running from greater income inequality to more household borrowing.