FINANCIAL DEVELOPMENT AND INCOME INEQUALITY: A PANEL DATA ANALYSIS

The aim of this article is to study the role of financial development in the explanation of income inequality for a panel of 98 countries during the period 1980-2006. Our approach consists in defining three convergence clubs by using the distribution convergence test, as well as in estimating a dynamic panel model, inspired by the model developed by Aghion et al. (2004), both for the countries as a whole and for the three groups of countries we have determined. The estimations concerning the total sample reveal that stable macroeconomic environments play a more prominent role in the reduction of income inequality than financial development. The estimations concerning every convergence club show the presence of a non-uniform effect of financial development on income inequality. Clubs 1 and 3 feature income inequality reduction in relation to the USA through financial development. On the other hand, the macroeconomic stability of club 2 has strengthened the income catchup process.