Financial sector development and inequality: is there a financial Kuznets curve?

The existing empirical knowledge in the area of financial sector development and income inequality finds evidence for the theoretical work which posits a simple, linear relationship between the two variables. In this article, we subject the extant empirical knowledge to close scrutiny and point out to a potential dynamic and endogenous relationship between financial sector development and inequality. By using dynamic multivariate panel data analysis on a carefully selected data set of income inequality data for developed and developing countries spanning the period 1962–2006, we find robust empirical evidence for the existence of an inverted U-curve relationship between financial sector development and income inequality. In that token, we confirm the theoretical stipulations of Greenwood and Jovanovic (1990) for an inverted U-curve relationship between the financial sector and income inequality.