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Financial development and income inequality: a nonlinear econometric analysis of 21 African countries, 1994-2015

15 February 2021
Publication Type: Working Paper
JEL Code: C33, E44, I25, N17, O11, O16, Z13

A panel data analysis of financial inequality was conducted using the PSTR model to determine the threshold level at which excessive financial development worsens inequality. The results reveal evidence of a nonlinear effect between financial development and income inequality where the optimal level of financial development is found to be 19% as a share of GDP above which financial development increases inequality in African countries.  The findings combine into a U-shape relationship, in line with other research in African studies. In this particular case, policy-makers are challenged to come up with policies that enforce the distributive effects of financial development with a view to share wealth equitably.

Series title: Working Paper 853
1 February 2021
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