Financial development and widening income inequality in MENA countries

Abstract

This article is dedicated to presenting robust empirical evidence of the relationship between financial development and income inequality, considering the role of economic growth in this relationship. To do so, we use a panel dataset of 12 countries from Middle East and North Africa (MENA), and we provide strong support for the positive relationship between financial development and income inequality. To address potential endogeneity (or reverse causality) between financial development and income inequality, and to deal with the problem of unobserved country-specific effects in the data, we use instrumental variable estimates within a panel data framework. Additionally, we use satisfactory and reliable measures of financial development. The use of the overall financial development index is one of the aspects of the empirical part of this study.