The effect of financial development on income inequality in Turkey: An estimate of the Greenwood-Jovanovic hypothesis

Abstract

This paper is the first to examine the linear and nonlinear effect of financial development on income inequality in Turkey over the period of 1980-2013. Financial development is represented by disaggregated and aggregated indicators. In this way, the effects of various financial indicators on income inequality are explained. Maki (2012) structural breaks co-integration test, and Stock and Watson (1993) dynamic ordinary least squares (DOLS) methods are followed for empirical analysis. Finally, the fully modified least squares (FM-OLS) regression analysis method developed by Philips and Hansen (1990) is used for robustness check. The estimation results of the linear relationship indicate that financial development is a mitigating effect on income inequality. These results support the inequality-narrowing hypothesis. The non-linear relationship results show that financial development first increases income inequality but after financial development reaches a certain level, this effect is reversed and financial development reduces income inequality. These results support the Greenwood-Jovanovic hypothesis. All the results strongly suggest that financial development is a mitigating or improving effect on income inequality over the long-run.

The Role of Financial Development in the Relationship Between Income Inequality and Economic Growth: Evidence from Method of Moments Quantile Regression

“…In Model 2 and Model 3 too, where control variables were integrated, identical results were obtained. Results collected from Models 1, 2 and 3 confirmed that between FD and income inequality an inverted U relationship existed, and these findings are aligned with studies conducted by Clarke et al (2003Clarke et al ( , 2007, Rehman et al (2008), Batuo et al (2010), Kim and Lin (2011), Rötheli (2011), Nikoloski (2012, Shahbaz et al (2014), Koçak and Uzay (2019).…”

“…A different hypothesis suggests that financial development would expand income inequality (positive linearity), the widening hypothesis. This hypothesis puts forth that in countries with a weak financial structure, those wealthy and with good connections benefited more from the financial development compared to the poor, and as expected, financial development would fail to contract income inequality (Koçak and Uzay, 2019). Unlike rich people who can provide their assets as collateral in return for any purchased service, poor citizens would have no collateral to offer to financial intermediaries and as a consequence, they would not sufficiently benefit from the provided services.…”

“…al. (2014), Nasreddine and Mensi (2016), Koçak and Uzay (2019), Bittencourt et al (2019) analysed this relationship in their studies by focusing on a single country. Liang (2008) studied the relationship between financial development and income inequality through the China case model.…”

“…In the literature, three differences in the relationship between financial development and income inequality have been highlighted with hypotheses (Koçak and Uzay, 2019) which are nonlinear: inverted U hypothesis, negative linear hypothesis and positive linear hypothesis.…”

Financial Development and Income Inequality: Evidence from Thailand

“…This U-shape form is similar to that found by Kuznets (1955), but the latter describes inequality in relation to GDP per capita rather than financial development. The Ushape hypothesis is widely accepted (Koçak & Uzay, 2019;Destek et al, 2020;Kavya & Shijin, 2020). However, Piketty (2014) disagreed, arguing that the gap of earnings would never converge as long as the return from assets continues to grow higher than economic (income) growth.…”