Financial development, income inequality, and country risk

Abstract

This study explores the non-linear effects of both finance development and country risks on income inequality when countries’ risk changes through a broad sample of 59 countries over the period 1985–2015. Using the panel smooth transition regression model, our results present evidence of the different relationships among income inequality, finance development, and country risks under different degrees of country risk. For the full sample, we find evidence of the inequality-widening hypothesis under unstable economic, stable financial, and stable political environments. For the sub-samples, under stable economic and financial environments, high-income countries’ income inequality can be improved through financial development. Moreover, we find a positive relationship between financial development and income inequality for low-income countries.