Re-examining the finance-inequality nexus: is the relationship contingent on the degree and type of financial development?

This paper revisits the debate on the impact of finance on income inequality by exploring variations across different contexts and dimensions of financial development. Using panel threshold methods and a sample of 110 countries during 1980–2014, two main findings emerge. First, the effect of financial development on inequality is non-monotonic, depending on a country’s stage of banking and stock market development. Second, the impact differs based on the specific dimension of financial development. At low stages of financial development, greater banking sector depth is associated with reduced income inequality, while other dimensions show no statistically significant effect. In more financially developed countries, financial development tends to increase inequality. These findings highlight significant linkages between SDGs 10 and 8, indicating that expanding access to banking services may contribute to reducing inequality in less developed economies. The results remain robust to a variety of controls, country-specific heterogeneity, and an alternative methodology.