The impact of financial deepening on income inequality: Empirical evidence from Australia

Abstract The present research paper is designed to explore the role of financial development indicators on income inequality in Australia using yearly data from 1980 to 2014. Our study also accounts for other potential determinants of income inequality such as inflation, per capita income and trade openness. Our results from Bayer and Hanck (2013) cointegration test confirm the long‐run equilibrium relationship across the models. Similarly, the long‐run estimates from the quantile regression models and non‐parametric approach indicate that the financial development indicators, foreign direct investment (FDI) inflows, inflation and trade openness have significant positive impact on income inequality in Australia. However, the growth in per capita income plays the opposite role. Given these findings, our study offers numerous policy and practical implications and adds an important value to the empirical literature on the nexus between financial development and income inequality.