Conference Paper
Financialization and Income Inequality
No.
ERF_31_FN181
Publisher
ERF
Date
March, 2025
Topic
G. Financial Economics
This study aims to explore the nonlinear impact of financial integration on income inequality during the period of 1996-2019. To this end, we apply data-driven panel fixed effect threshold procedure of Hansen (1999) for the set of advanced economies (AE) and emerging market and developing economies (EMDE) including MENA countries. Our results suggest that international financial integration (IFI) provides a data-driven estimated threshold for the effect of IFI on income inequality. IFI is positively associated with inequality in AE, albeit this positive relation diminishes in more financially integrated episodes. In EMDE, inequality decreases with IFI in less financially integrated episodes while increasing in more financially integrated observations. We also decompose IFI into capital inflows and capital outflows. Our empirical findings reveal that the relationship between IFI and inequality is driven by both capital inflows and outflows in AE while it is determined by capital inflows in EMDE. Finally, we investigate whether the impact of IFI on inequality changes with the level of financial development. The empirical findings suggest that the inequality-increasing effect of IFI is much lower in financially more developed episodes in EMDE. These results imply that policies fostering financial development and equitable financial access are crucially important to mitigate the adverse effects of IFI on inequality, especially in EMDE.
Authors
Abdullah Gülcü
Research Assistant, Department of Economics, Ankara University,
Authors
Erdal Özmen
Professor of Economics, Middle East Technical University
Authors
Fatma Taşdemir
Associate Professor, Department of International Trade and...