Financial Development and Income Inequality: A Panel Data Approach

We analyze 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 to 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 and GDP per capita, we find that financial development has a positive effect on income inequality. These results are robust to different measures of financial development, econometric specifications, and control variables.