The effect of financial development on economic growth and income distribution: an empirical evidence from lower-middle and upper-middle-income countries

Financial development and its relationships with economic growth and income inequality have recently received considerable attention. The present study investigates the relationships between financial development and (i) economic growth, using data from 44 countries; (ii) economic inequality, using...

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Published in:Development studies research Vol. 9; no. 1; pp. 117 - 128
Main Authors: Abbas, Zaheer, Afshan, Gul, Mustifa, Ghulam
Format: Journal Article
Language:English
Published: Abingdon Routledge 31.12.2022
Taylor & Francis Ltd
Taylor & Francis Group
Subjects:
Banking industry
Causality
Development economics
Economic development
Economic growth
Financial development
Financial services
GDP
Gross Domestic Product
Growth models
Hypotheses
Income distribution
Income inequality
Literature reviews
Longitudinal studies
middle - income countries
panel data
ISSN:2166-5095, 2166-5095
Online Access:Get full text
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Summary:Financial development and its relationships with economic growth and income inequality have recently received considerable attention. The present study investigates the relationships between financial development and (i) economic growth, using data from 44 countries; (ii) economic inequality, using data from 42 middle-income countries. Estimates are obtained through a panel Autoregressive Distributed Lag (ARDL) model for a period of 23 years (1995-2018). Results reveal that financial development contributes to economic growth in both groups of countries in the long run. However, the contribution financial development makes to economic growth is more noticeable in the case of upper-middle income countries. Additionally, Granger causality test based on Vector Error Correction (VEC) showed two-way Granger causality between financial development and economic growth. Findings disclosed an inverted U-shaped association between financial development and income inequality for both lower-middle income and upper-middle income countries. This study can aid policymakers in designing policies that can strengthen financial systems, thereby enhancing economic growth and reducing income inequality.
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ISSN:2166-5095
2166-5095
DOI:10.1080/21665095.2022.2065325