Financial Development and Income Inequality Relationship: Analyzing Financial Kuznets Curve with ARDL Boundary Test in Turkey

Abstract

In this study, the relationship between the financial development and the income inequality in Turkey is investigated by testing the validity of Financial Kuznets Curve Hypothesis. To examine this relationship for the period of 1987 2017, the variables of the public final consumption expenditures, the modern sector share, the inflation and the human capitalare also added to the model setted as control variables, and the long term relationships among the variables are analyzed by using the ARDL (The Autoregressive Distributed Lag) Boundary Test approach. Empirical evidence refers to the validity of the Financial Kuznets Curve Hypothesis in Turkey, in other words, there is an inverse U shaped relationship between the financial development and the income inequality. Accordingly, while the financial development raises the inequality in income distribution to a certain threshold level, it reduces the inequality after this threshold level in Turkey. Moreover, in the long run increases in the modern sector share, the public final consumption expenditures and in the trade openness help to reducing income inequality but increases in the inflation and in the human capital make worse income inequality.

Keywords: Financial Development, Income Inequality, Financial Kuznets Curve, ARDL Boundary Test.

DOI: 10.7176/JSTR/7-01-07