Economic development, financial development, and income inequality nexus

Income inequality has gained prominence by exacerbating the economic stability of both developed and developing countries over the past few decades. The intensity of this issue is non-trivial with economies witnessing failure in policies, indecorous economic governance, and the challenging economic ideologies. The present study examines the interconnection between economic development and financial development on income inequality, considering Kuznets hypothesis, Greenwood and Jovanovic hypothesis and the new specification by Baiardi and Morana, using unbalanced dynamic panel GMM estimation models. Following revised country classification given by International Monetary Fund (IMF) in 2016, the study includes an unbalanced panel of 85 countries consisting of 28 high-income, 41 middle-income, and 16 low-income countries for the period ranging from 1984 to 2014. The findings of the study reveal that there is no clear-cut evidence to support the proposition of economic development along with financial growth, which would reduce the problem of income inequality. Moreover, in most advanced or highly developed high-income countries also do not enjoy the benefits of financial development.