Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/331425 
Year of Publication: 
2025
Series/Report no.: 
WIDER Working Paper No. 59/25
Publisher: 
The United Nations University World Institute for Development Economics Research (UNU-WIDER), Helsinki
Abstract: 
An important feature of the process of transformation in developing economies is the depth and outreach of their capital and credit markets, i.e. financial development. As this is often considered crucial to support growth and poverty reduction, it is important to understand what structural factors drive it. The literature so far has assessed the role of historical, political, cultural, and institutional determinants, but has not yet adequately investigated the role of inequality. This paper addresses this lacuna by empirically investigating its effects. Exploiting instrumental variable estimations for a sample of up to 166 economies during 1960-2019, cross-section and panel results find that inequality has a negative effect on credit market development, which works both via the top and bottom parts of the distribution. They also find that, when accounting for its effects on economic development, inequality supports capital market development. The results are robust to a variety of checks, including violation of the exclusion restriction, a rich set of controls, alternative samples, and alternative income inequality data and financial development measures.
Subjects: 
financial development
income inequality
credit markets
capital markets
financial systems
Sustainable Development Goal 10
Sustainable Development Goal 8
JEL: 
D63
O16
P00
C24
C23
Persistent Identifier of the first edition: 
ISBN: 
978-92-9267-618-6
Document Type: 
Working Paper

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