Does financial market growth improve income distribution? A comparison of developed and emerging market economies of the global sample

Abstract

The objective of this research is to investigate the effects of stock market indicators, banking, and foreign direct investment inflows on income inequalities in developed and emerging market economies around the world. For this reason, the study utilizes annual data that range from 1981 to 2014 on the selected indicators. Given the nature of our variables, we employ panel autoregressive distributed lag models to explore the long-run estimates of income inequalities. The long-run estimates indicate that the stock market indicators have significant positive and negative impact on income inequalities in developed and emerging market economies, respectively. Further, our findings show that the banking credit adversely affects income inequalities both in developed and emerging economies. Our results also establish significant short-run causalities among stock market indicators and income inequalities. Given these findings, we argue that the stock markets are playing an important role in reducing income inequalities in emerging economies whereas they contribute for higher inequalities in developed economies.