<abstract xmlns="http://www.w3.org/1999/xhtml"><p>This paper is the first to examine the linear and nonlinear effect of financial development on income inequality in Turkey over the period of 1980-2013. Financial development is represented by disaggregated and aggregated indicators. In this way, the effects of various financial indicators on income inequality are explained. <xref ref-type="bibr" rid="j_revecp-2019-0017_ref_046_w2aab3b7b5b1b6b1ab1ac46Aa">Maki (2012)</xref> structural breaks co-integration test, and <xref ref-type="bibr" rid="j_revecp-2019-0017_ref_061_w2aab3b7b5b1b6b1ab1ac61Aa">Stock and Watson (1993)</xref> dynamic ordinary least squares (DOLS) methods are followed for empirical analysis. Finally, the fully modified least squares (FM-OLS) regression analysis method developed by <xref ref-type="bibr" rid="j_revecp-2019-0017_ref_052_w2aab3b7b5b1b6b1ab1ac52Aa">Philips and Hansen (1990)</xref> is used for robustness check. The estimation results of the linear relationship indicate that financial development is a mitigating effect on income inequality. These results support the inequality-narrowing hypothesis. The non-linear relationship results show that financial development first increases income inequality but after financial development reaches a certain level, this effect is reversed and financial development reduces income inequality. These results support the Greenwood-Jovanovic hypothesis. All the results strongly suggest that financial development is a mitigating or improving effect on income inequality over the long-run.</p></abstract>

This paper is the first to examine the linear and nonlinear effect of financial development on income inequality in Turkey over the period of 1980-2013. Financial development is represented by disaggregated and aggregated indicators. In this way, the effects of various financial indicators on income inequality are explained. Maki (2012) structural breaks co-integration test, and Stock and Watson (1993) dynamic ordinary least squares (DOLS) methods are followed for empirical analysis. Finally, the fully modified least squares (FM-OLS) regression analysis method developed by Philips and Hansen (1990) is used for robustness check. The estimation results of the linear relationship indicate that financial development is a mitigating effect on income inequality. These results support the inequality-narrowing hypothesis. The non-linear relationship results show that financial development first increases income inequality but after financial development reaches a certain level, this effect is reversed and financial development reduces income inequality. These results support the Greenwood-Jovanovic hypothesis. All the results strongly suggest that financial development is a mitigating or improving effect on income inequality over the long-run.

The effect of financial development on income inequality in Turkey: An estimate of the Greenwood-Jovanovic hypothesis

Faculty of Economics and Administrative Sciences, Department of Economics

Review of Economic Perspectives

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

This paper is the first to examine the linear and nonlinear effect of financial development on income inequality in Turkey over the period of 1980-2013....

The effect of financial development on income inequality in Turkey: An estimate of the Greenwood-Jovanovic hypothesis

Published Online: Dec 21, 2019

Page range: 319 - 344

Received: Sep 21, 2018

Accepted: Oct 04, 2019

DOI: https://doi.org/10.2478/revecp-2019-0017

Keywords
Financial development, Income inequality, Greenwood-Jovanovic hypothesis, Turkey

© 2019 Emrah Koçak et al., published by Sciendo

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

The effect of financial development on income inequality in Turkey: An estimate of the Greenwood-Jovanovic hypothesis

Published Online: Dec 21, 2019

Page range: 319 - 344

Received: Sep 21, 2018

Accepted: Oct 04, 2019

DOI: https://doi.org/10.2478/revecp-2019-0017

KeywordsFinancial development, Income inequality, Greenwood-Jovanovic hypothesis, Turkey

© 2019 Emrah Koçak et al., published by Sciendo

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

Keywords
Financial development, Income inequality, Greenwood-Jovanovic hypothesis, Turkey