Panel data analysis of financial development, economic growth and rural-urban income inequality

Purpose The purpose of this paper is to examine the relationship between financial development and rural-urban income inequality (INQ) in South Asian Association for Regional Cooperation (SAARC) countries using panel data from 1986-2012. Design/methodology/approach The stationarity properties are checked by the LLC and IPS panel unit root tests. The paper applied the Pedroni's panel co-integration test to examine the existence of the long-run relationship and coefficients of co-integration are examined by fully modified ordinary least squares. The short-term and long-run causality is examined by panel Granger causality. Findings The results of Pedroni co-integration test indicate that there exists a long-run relationship among the variables. The findings suggest that financial development increases rural-urban inequality whereas trade openness reduces rural-urban inequality. The empirical results of panel Granger causality indicate evidence of short-run causality confirms that economic growth and financial development causes rural-urban INQ. Research limitations/implications The present study recommends for appropriate economic and financial reforms focusing on financial inclusion to reduce rural-urban INQ in SAARC countries. Financial policies geared toward agriculture and rural population should be adopted to reduce the prevailing rural-urban INQ in SAARC region. Originality/value Till date, there is hardly any study exploring the causal relationship between financial development and rural-urban INQ for SAARC countries by using panel co-integration and causality techniques. So the contribution of the paper is to fill these research gaps in the literature.