Does Financial Sector Development Increase Income Inequality? Some Econometric Evidence from Bangladesh

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DOES FINANCIAL SECTOR DEVELOPMENT INCREASE INCOME INEQUALITY?
SOME ECONOMETRIC EVIDENCE FROM BANGLADESH

DOES FINANCIAL SECTOR DEVELOPMENT INCREASE INCOME INEQUALITY?
SOME ECONOMETRIC EVIDENCE FROM BANGLADESH

Abu N.M. Wahid
Tennessee State University
Muhammad Shahbaz
COMSATS Institute of Information Technology, Lahore, Pakistan
Mehmood Shah
University of Management and Technology, Lahore, Pakistan
Mohammad Salahuddin
Southeast University Banani, Dhaka, Bangladesh

ABSTRACT
This paper is an attempt to examine the relationship between financial development and income inequality. In doing so, we have used Bangladeshi data for the period 1985-2006. We have employed auto-regressive distributed lag (ARDL) methodology for cointegration. We have also carried out sensitivity analysis and stability tests. Our findings suggest that financial development increases income inequality. Economic growth seems to equalize income distribution. Inflation and trade openness also worsen income inequality. Finally, income inequality is being increased by social spending in the country over long run. This study provides new directions for policy makers to reduce income inequality to share the fruits of economic development among the wider spectrum of the society.
Keywords: Financial sector, development, trade openness, income inequality, Bangladesh
JEL Classifications: D14, D33, F1

INTRODUCTION
Economic growth and its correlates have been the focus of a large number of studies over the recent past. These studies primarily put emphasis on various aspects or sources of growth. One of the important correlates of economic growth that has been studied prominently is the extent of financial sector development. The positive and robust relationship between well-functioning financial system and economic growth is empirically a well established fact. Higher levels of financial development are significantly and robustly correlated with current and future rates of economic

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