Financial evolution and income inequality: channels and evidence

The thesis makes original contribution to knowledge in income inequality research area by investigating the links between financial developments and income inequality for a diverse panel of 36 countries over a 26-year period from 1980 to 2005. Based on an extensive literature review and use of a new set of stylised facts, the initial chapter of the thesis reviews the association between the evolution of financial aspects of the economy and income distribution. The outcomes demonstrate that financial globalisation, financial development, and financial liberalisation are among the key factors affecting income inequality, setting a clear context for impending empirical investigations. The first empirical chapter investigates the associations between financial globalisation and development, and income inequality. The chapter makes a contribution by investigating that whether different measures of financial globalisation can have opposing effects on inequality. The outcome show that the de jure and de facto measures of financial globalisation affect income inequality in opposing directions where the former abbreviates it, and the latter aggravates it. In an attempt to make further contribution, the chapter proposes that financial development accompanied with robust banking supervision can reduce income inequality. The results show that financial development integrated with a robust banking supervision can reduce income inequality. The second empirical chapter investigates the association between financial liberalisation and income inequality, with particular emphasis on the role of human capital investments. Contributing to income inequality research field, the results show that financial liberalisation, removal of credit controls in particular, reduces income inequality through creating a more convenient path for the low income group to borrow funds, invest in human capital and get better paid skilled-jobs.