We use heterogeneous panel cointegration techniques to examine the long-run effect of financial development on income inequality in a panel of 119 countries from 1980 to 2015. We include real GDP per capita in the cointegration relation and explicitly deal with cross-sectional dependence in the data that arises due to unobserved common factors. On average, financial development reduces income inequality in the long-run, with the result robust to different measures of finance and across country income groups.
- Financial development
- Heterogeneous panel cointegration
- Income inequality