The effect of financial development on income inequality in Turkey: An estimate of the Greenwood-Jovanovic hypothesis

• Main Authors: Koçak Emrah, Uzay Nısfet
• Format: Article
• Language: English
• Published: Sciendo 2019-12-01
• Series: Review of Economic Perspectives
• Subjects: financial development; income inequality; greenwood-jovanovic hypothesis; turkey
• Online Access: https://doi.org/10.2478/revecp-2019-0017

This paper is the first to examine the linear and nonlinear effect of financial development on income inequality in Turkey over the period of 1980-2013. Financial development is represented by disaggregated and aggregated indicators. In this way, the effects of various financial indicators on income inequality are explained. Maki (2012) structural breaks co-integration test, and Stock and Watson (1993) dynamic ordinary least squares (DOLS) methods are followed for empirical analysis. Finally, the fully modified least squares (FM-OLS) regression analysis method developed by Philips and Hansen (1990) is used for robustness check. The estimation results of the linear relationship indicate that financial development is a mitigating effect on income inequality. These results support the inequality-narrowing hypothesis. The non-linear relationship results show that financial development first increases income inequality but after financial development reaches a certain level, this effect is reversed and financial development reduces income inequality. These results support the Greenwood-Jovanovic hypothesis. All the results strongly suggest that financial development is a mitigating or improving effect on income inequality over the long-run.