Social Indicators Research

, Volume 124, Issue 2, pp 357–382 | Cite as

Financial Development and Income Inequality: Is There Any Financial Kuznets Curve in Iran?

  • Muhammad Shahbaz
  • Nanthakumar Loganathan
  • Aviral Kumar Tiwari
  • Reza Sherafatian-Jahromi
Article

Abstract

This paper deals with the investigation of the relationship between financial development and income inequality in case of Iran. In doing so, we have applied the ARDL bounds testing approach to examine the long-run relationship in the presence of structural break in the series. The unit root properties have been tested by applying Zivot and Andrews (in J Bus Econ Stat 10:251–270, 1992) and Clemente et al. (in Econ Lett 59, 175–182, 1998) structural break tests. The VECM Granger causality approach is used to detect the direction of the causal relationship between financial development and income inequality. Moreover, Greenwood–Jovanovich (GJ) hypothesis has also been tested for Iranian economy. Our results confirm the long run relationship between the variables. Furthermore, financial development reduces income inequality. Economic growth worsens income inequality, but inflation and globalization improve income distribution. Finally, GJ hypothesis is found as well as U-shaped relationship between globalization and income inequality in case of Iran. This study might provide new insights for policy makers to reduce income inequality by making economic growth more fruitful for poor segment of population and directing financial sector to provide access to financial resources of poor individuals at cheaper cost.

Keywords

Financial development Income inequality Iran 

References

  1. Agenor, P. R. (2003). Does globalization hurt the poor? World Bank Policy Research, Working Paper, No. 2922.Google Scholar
  2. Akhmet, G., Zaman, K., & Shukui, T. (2014). Impact of financial development on SAARC’s human development. Quality & Quantity, 48(5), 2801–2816.CrossRefGoogle Scholar
  3. Anderson, T. B., & Tarp, F. (2003). Financial liberalization, financial development and economic growth in LDCs. Journal of International Development, 15, 189–209.CrossRefGoogle Scholar
  4. Ang, J. B. (2009). Financial liberalization and income inequality. MPRA, Paper No. 14496.Google Scholar
  5. Arora, R. U. (2012). Finance and inequality: A study of Indian states. Applied Economics, 44, 4527–4538.CrossRefGoogle Scholar
  6. Baliscan, A., & Fuwa, N. (2003). Growth, inequality and politics revisited: A developing-country case. Economics Letters, 79, 53–58.Google Scholar
  7. Banerjee, A. V., & Newman, A. F. (1993). Occupational choice and the process of development. Journal of Political Economy, 101, 274–298.CrossRefGoogle Scholar
  8. Barro, R. J. (2000). Inequality and growth in a panel of countries. Journal of Economic Growth, 5, 87–120.CrossRefGoogle Scholar
  9. Batuo, M. E., Guidi, F., & Mlambo, K. (2012). Financial development and income inequality: Evidence from African Countries. African Development Bank.Google Scholar
  10. Beck, T., Demirguc-Kunt, A., & Levine, R. (2004). Finance, inequality and poverty: Cross-country evidence. Bank Policy Research Working Paper, 3338, World Bank, Washington D.C.Google Scholar
  11. Beck, T., Demirgüç-Kunt, A., & Levine, R. (2007). Finance, inequality and the poor. Journal of Economic Growth, 12, 27–49.CrossRefGoogle Scholar
  12. Behrman, J., Nancy, B., & Miguel, S. (2001). Economic policy differentials in Latin America, Penn Institute for Economic Re-search WP 01-048.Google Scholar
  13. Bittencourt, M. (2010). Financial development and inequality: Brazil 1985–1994. Economic Change and Restructuring, 43, 113–130.CrossRefGoogle Scholar
  14. Brown, R.L., Durbin, J., & Evans, J. M. (1975). Techniques for testing the constancy of regression relations over time. Journal of the Royal Statistical Society, 37, 149–163.Google Scholar
  15. Bonfiglioli, A. (2005). Equities and inequality. IIES Seminar Paper 737.Google Scholar
  16. Bourguignon, F., & Verdier, T. (2000). Oligarchy, democracy, inequality and growth. Journal of Development Economics, 62, 285–313.CrossRefGoogle Scholar
  17. Calderón, C., & Servén, L. (2003). The output cost of latin america’s infrastructure gap. In: W. Easterly & L. Servén (Eds.), The limits of stabilization: Infrastructure, public Deficits, and growth in latin america (pp. 95–118). Stanford University Press and the World Bank.Google Scholar
  18. Canavire-Bacarreza, G., & Rioja, F. (2009). Financial development and the distribution of income in Latin America and the Caribbean. Well-Being and Social Policy, 5, 1–18.Google Scholar
  19. Chambers, D., Wu, Y., & Yao, H. (2007). A tale of two provinces: How growth can help or hinder equality in China. International Research Journal of Finance and Economics, 12, 214–220.Google Scholar
  20. Christopoulos, D. K., & Tsionas, E. G. (2004). Financial development and economic growth: Evidence from panel unit root and cointegration Tests. Journal of Development Economics, 73, 55–74.CrossRefGoogle Scholar
  21. Chun, J., & Peng, J. (2011). How does financial development improve income distribution: Theory development and countermeasures of China. Journal of Financial Development Research, CNKI: SUN: SDJR.0.2011-11-002.Google Scholar
  22. Claessens, S. (2006). Access to financial services: A review of the issues and public policy objectives. World Bank Research Observer, 21, 91–122.CrossRefGoogle Scholar
  23. Clarke, G., Xu L.C., & H. Zou (2003). Finance and income inequality: Test of alternative theories, World Bank Policy Research Working Paper.Google Scholar
  24. Clarke, G., Xu L.C., & H. Zou (2007). Finance and income inequality: What do the data tell us? Southern Economic Journal, 72, 578–596.Google Scholar
  25. Clemente, J., Montanes, A., & Reyes, M. (1998). Testing for a unit root in variables with a double change in the mean. Economics Letters, 59, 175–182.CrossRefGoogle Scholar
  26. Dickey, D.A., & Fuller, W. A. (1981). Likelihood ratio statistics for autoregressive time series with a unit root. Econometrica, 49, 1057–1072.Google Scholar
  27. Dickey D.A., & Fuller, W.A. (1979). Distribution of the estimators for autoregressive time series with unit root, Journal of the American Statistical Association, 74, 427–481.Google Scholar
  28. Dollar, D., & Kraay, A. (2002). Growth is good for the Poor. Journal of Economic Growth, 7, 195–225.CrossRefGoogle Scholar
  29. Dreher, A. (2006). Does globalization affect growth? Evidence from a new index of globalization. Applied Economics, 38(10), 1091–1110.Google Scholar
  30. Elliott, G., Rothenberg, T., & Stock, J. (1996). Efficient tests for an autoregressive unit root. Econometrica, 64, 813–836.Google Scholar
  31. Galor, O., & Zeira, J. (1993). Income distribution and macroeconomics. Review of Economic Studies, 60, 35–52.CrossRefGoogle Scholar
  32. Gimet, C., & Lagoarde-Segot, T. (2011). A closer look at financial development and income distribution. GATE working paper-1104.Google Scholar
  33. Goldsmith, R. W. (1969). Financial structure and development. Yale: Yale University Press.Google Scholar
  34. Granger, C. W. J. (1969). Investigating causal relationships by econometric models and cross-spectral methods. Econometica, 37, 424–438.Google Scholar
  35. Greenwood, J., & Jovanovich, B. (1990). Financial development, growth, and the distribution of income. Journal of Political Economy, 98, 1076–1107.CrossRefGoogle Scholar
  36. Hamori, S., & Hashiguchi, Y. (2012). The effect of financial deepening on inequality: Some international evidence. Journal of Asian Economics, 23, 353–359.CrossRefGoogle Scholar
  37. Hansen, B. E. (1992). Tests for parameter stability in regressions with I(1) processes. Journal of Business and Economic Statistics, 10, 321–335.Google Scholar
  38. Hansen, B. E. (1999). Threshold effects in non-dynamic panels: Estimation, testing, and inference. Journal of Econometrics, 93(2), 345–368.Google Scholar
  39. Heshmati, A. (2004). The relationship between income inequality, poverty and globalization. IZA Discussion Paper 2004:1277.Google Scholar
  40. Honohan, P. (2004a). Financial development, growth and poverty: How close are the links? World Bank Policy Research Working Paper No.: 3203.Google Scholar
  41. Honohan, P. (2004b). Financial sector policy and the poor: Selected findings and issues. Washngton DC: The World Bank.CrossRefGoogle Scholar
  42. Huang, J. -T., Kao, A. -P., & Chiang., T. -F. (2011). The Granger causality between economic growth and income inequality in Post-reform China. The International Centre for the Study of East Asian Development (ICSEAD), Kitakyushu, Japan.Google Scholar
  43. Iyigun, M. F., & Owen, A. L. (2012). Income inequality, financial development and macroeconomic fluctuations. The Economic Journal, 114, 352–376.CrossRefGoogle Scholar
  44. Jalil, A., & Feridun, M. (2011). Long-run relationship between income inequality and financial development in China. Journal of the Asia Pacific Economy, 16, 202–214.CrossRefGoogle Scholar
  45. Jalilian, H., & Kirkpatrick, C. (2005). Does financial development contribute to poverty reduction? Journal of Development Studies, 41, 636–656.CrossRefGoogle Scholar
  46. Khan, M. A., Khan, M. Z., Zaman, K., & Khan, A. (2014). Poverty- growth-inequality triangle by principal component analysis: With an empirical illustration using Pakistan’s data. International Journal of Rural Development, 10(1), 69–86.CrossRefGoogle Scholar
  47. Kim, D.-H., & Lin, S.-C. (2011). Nonlinearity in the financial development and income inequality nexus. Journal of Comparative Economics, 39, 310–325.CrossRefGoogle Scholar
  48. King, R. G., & Levine, R. (1993). Finance and growth: Schumpeter might be right. The Quarterly Journal of Economics, 108, 717–737.CrossRefGoogle Scholar
  49. Kirkpatrick, C. (2000). Financial development, economic growth, and poverty reduction. The Pakistan Development Review, 39, 363–388.Google Scholar
  50. Kwiatkowski, D., Phillips, P., Schmidt, P., & Shin, Y. (1992). Testing the null hypothesis of stationary against the alternative of a unit root: How sure are we that economic time series have a unit root? Journal of Econometrics, 54, 159–178.Google Scholar
  51. Law, S.-H., & Tan, H.-B. (2009). The role of financial development on income inequality in Malaysia. Journal of Economic Development, 34, 134–168.Google Scholar
  52. Leow, Y. G. (2004). A reexamination of the exports in Malaysia’s economic growth: After Asian financial crisis, 1970-2000. International Journal of Management Sciences, 11, 79–204.Google Scholar
  53. Levine, R. (1997). Financial development and economic growth: Views and agendas. Journal of Economic Literature, 35, 688–726.Google Scholar
  54. Levine, R., Loayza, N., & Beck, T. (2000). Financial intermediation and growth: Causality and causes. Journal of Monetary Economics, 46, 31–77.CrossRefGoogle Scholar
  55. Li, H., Lyn, S., & Zou, H.-F. (1998). Explaining international and intertemporal variations in income inequality. Economic Journal, 108, 26–43.CrossRefGoogle Scholar
  56. Liang, Z. (2006). Financial development and income distribution: A system GMM panel analysis with application to urban China. Journal of Economic Development, 2, 1–21.Google Scholar
  57. Lindert, P. H., & Williamson, J. G. (2001). Does globalization make the World more unequal? NBER Working Paper 2001:8228.Google Scholar
  58. Ling-zheng, Y., Xia-hai, W. (2012). Has financial development worsened income inequality in China? Evidence from threshold regression model. Journal of Finance and Economics, CNKI: SUN:CJYJ.0.2012-03-009.Google Scholar
  59. Lopez, H. (2004). Pro-poor-pro-growth: Is there a trade off? Policy Research Working Paper, 3378, The World Bank.Google Scholar
  60. Lütkepohl, H. (2006). Structural vector autoregressive analysis for cointegrated variables. AStA Advances in Statistical Analysis, 90, 75–88.Google Scholar
  61. Ma, Y., & Jalil, A. (2008). Financial development, economic growth and adaptive efficiency: A comparison between China and Pakistan. China & World Economy, 16, 97–111.CrossRefGoogle Scholar
  62. McKinnon, R. I. (1973). Money and capital in economic development. Brookings Institution.Google Scholar
  63. Mousavi, S. N., & Taheri, F. (2008). Globalization and income inequality: Case of Iran. American-Eurasian Journal of Agriculture & Environmental Sciences, 2, 118–123.Google Scholar
  64. Narayan, P. K. (2005). The saving and investment nexus for China: evidence from cointegration tests. Applied Economics, 37(17), 1979–1990.Google Scholar
  65. Ng, S., & Perron, P. (2001). Lag length selection and the construction of unit root tests with good size and power. Econometrica, 69, 1519–1554.Google Scholar
  66. Nikoloski, Z. (2012). Financial sector development and inequality: Is there any Financial Kuznets curve? Journal of International Development,. doi:10.1002/jid.2843.Google Scholar
  67. Ouattara, B. (2004). Modelling the long run determinants of private investment in Senegal. The School of Economics Discussion Paper Series 0413, Economics, The University of Manchester.Google Scholar
  68. Pagano, M. (1993). Financial markets and growth: An overview. European Economic Review, 37, 613–622.CrossRefGoogle Scholar
  69. Pagano, M., & Volpin, P. (2001). The political economy of corporate governance. CEPR Discussion Papers 2682, C.E.P.R. Discussion Papers.Google Scholar
  70. Perron, P., & Vogelsang, T. J. (1992). Testing for a unit root in a time series with a changing mean: Corrections and extensions. Journal of Business & Economic Statistics, 10, 467–470.Google Scholar
  71. Perotti, R. (1996). Growth, income distribution and democracy: What the data say? Journal of Economic Growth, 1, 149–187.Google Scholar
  72. Pesaran, M. H., & Shin, Y. (1999). An autoregressive distributed lag modeling approach to cointegration analysis. In S. Strom (Ed.), Chapter 11 in Econometrics and Economic Theory in the 20th Century: The Ragnar Frisch Centennial Symposium. Cambridge: Cambridge University Press.Google Scholar
  73. Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16, 289–326.CrossRefGoogle Scholar
  74. Phillips, P. C. B., & Perron, P. (1988). Testing for a unit root in time series regression. Biometrica, 75, 335–446.CrossRefGoogle Scholar
  75. Rehman, H., Khan, S., & Ahmed, I. (2008). Income distribution, growth and financial development: A cross countries analysis. Pakistan Economic and Social Review, 46(1), 1–16.Google Scholar
  76. Risso, W. A., & Carrera, E. J. S. (2012). Inequality and economic growth in China. Journal of Chinese Economic and Foreign Trade Studies, 5, 80–90.CrossRefGoogle Scholar
  77. Rötheli, T. F. (2011). The Kuznets curve: Determinants of its shape and the role of finance. Studies in Economics and Finance, 28, 149–159.CrossRefGoogle Scholar
  78. Sebastian, J., & Sebastian, W. (2011). Financial development and income inequality. CESifo working paper: Fiscal Policy, Macroeconomics and Growth, No. 3687.Google Scholar
  79. Shahbaz, M. (2009). A reassessment of finance-growth nexus for Pakistan: Under the investigation of FMOLS and DOLS techniques. ICFAI Journal of Applied Economics, 8, 65–80.Google Scholar
  80. Shahbaz, M. (2010). Income inequality-economic growth and non-linearity: A case of Pakistan. International Journal of Social Economics, 37, 613–636.CrossRefGoogle Scholar
  81. Shahbaz, M., & Islam, F. (2011). Financial development and income inequality in Pakistan: An application of ARDL approach. Journal of economic development, 36, 35–58.Google Scholar
  82. Shan, J. (2005). Does financial development ‘lead’ economic growth? A vector autoregression approach. Applied Economics, 37, 1353–1367.CrossRefGoogle Scholar
  83. Shiva, R. (2001). Impact of financial security in long run on growth and economical development in Iran. Quarterly Journal of Agriculture Economic and Development, 34, 33–65.Google Scholar
  84. Siyal, G., Mohsin, A., & Zaman, K. (2014). Financial soundness and Pakistan’s economics growth: Turn on the light. International Journal of Economics and Empirical Research, 2(9), 359–371.Google Scholar
  85. Slottje, J. D., & Raj, B. (1998). Income inequality, poverty and economic welfare (p. 1998). New York: Springer.Google Scholar
  86. Stijn, C., & Perotti, E. (2007). Finance and inequality: Channels and evidence. Journal of Comparative Economics, 35, 748–773.CrossRefGoogle Scholar
  87. Tan, H.-B., & Law, S.-K. (2012). Nonlinear dynamics of the finance-inequality nexus in developing countries. Journal of Economic Inequality, 9, 1–13.Google Scholar
  88. Wahid, A. N. M., Shahbaz, M., & Azim, P. (2011). Inflation and financial sector correlation: The case of bangladesh. International journal of economics and financial issues, 1(4), 145–152.Google Scholar
  89. Westley, G. D. (2001). Can financial market policies reduce income inequality? Sustainable Development Department Technical Paper Series, No MSM-112. Washington: Inter-American Development Bank.Google Scholar
  90. Yu, P., & Qin, Z. (2011). Empirical analysis of financial development and income inequality in China. International Conference on E-Business and E-Governance (ICEE), pp. 1–4.Google Scholar
  91. Zaman, K., Izhar, Z., Khan, M. M., & Ahmad, M. (2012). The relationship between financial indicators and human development in Pakistan. Economic Modelling, 29(5), 1515–1523.CrossRefGoogle Scholar
  92. Zivot, E., & Andrews, K. (1992). Further evidence on the great crash, the oil price shock, and the unit root hypothesis. Journal of Business and Economic Statistics, 10, 251–270.Google Scholar

Copyright information

© Springer Science+Business Media Dordrecht 2014

Authors and Affiliations

  • Muhammad Shahbaz
    • 1
  • Nanthakumar Loganathan
    • 2
  • Aviral Kumar Tiwari
    • 3
  • Reza Sherafatian-Jahromi
    • 4
  1. 1.Department of Management SciencesCOMSATS Institute of Information TechnologyLahorePakistan
  2. 2.Faculty of Economics and Business ManagementUniversiti Sultan ZainalAbidinKuala TerengganuMalaysia
  3. 3.Faculty of Applied Economics, Faculty of ManagementICFAI University, TripuraWest Tripura, SadarIndia
  4. 4.Department of EconomicsUniversity Putra MalaysiaSerdangMalaysia

Personalised recommendations