FINANCIAL STABILITY AND INCOME INEQUALITY IN DEVELOPING COUNTRIES

This paper examines the relationship between financial stability and income inequality in 35 developing countries from 2004 to 2020 using system generalized method of moments (GMM) estimation. Four dimensions of the financial sector, namely financial stability, depth, access and efficiency were included as regressors. The results for the relationship of each of the financial dimensions with income inequality are mixed. In this study, inequality increases with an increase in the stability of the financial sector; on the contrary, the depth of the financial sector reduces inequality. Furthermore, not only does the dimension of the financial sector matter in addressing income inequality issues, but the quality of institutions is important. It is important for policy makers to understand linkages between financial dimensions and inequality so as to come up with appropriate prudential regulatory mechanisms.