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Seoul Journal of Economics
[ Article ]
Seoul Journal of Economics - Vol. 31, No. 2, pp.121-143
ISSN: 1225-0279 (Print)
Print publication date 30 May 2018
Received 19 Mar 2018 Revised 22 Mar 2018 Accepted 02 Apr 2018

Finance, Growth, and Inequality: New Evidence from the Panel VAR Perspective

Hyeok Jeong ; Soyoung Kim
Hyeok Jeong, Professor, Graduate School of International Studies, Seoul National University, 1 Gwanank-ro, Gwanak-gu, Seoul, South Korea, Tel: +82-2-880-2921, Fax: +82-2-879-1496 hyeokj@gmail.com
Soyoung Kim, Professor, Department of Economics, Institute of Economic Research, Seoul National University, 1 Gwanank-ro, Gwanak-gu, Seoul, South Korea, Tel: +82-2-880-2689, Fax: +82-2-880-4231 soyoungkim@snu.ac.kr

JEL Classification: O11, O47, E44, D31

Abstract

This study analyzes the relationship among financial development, economic growth, and income inequality using cross-country panel VAR models. Most theoretical models state that these variables interact with one another and generate feedback dynamics. Under the presence of such interactive dynamics, single-equation regression analysis cannot capture the genuine relationship among finance, growth, and inequality. We use the panel VAR models to reflect these interactive feedback dynamics. Our estimation results suggest that the real GDP per capita decreases in response to financial deepening shock in private credit or liquid liability but increases to stock market capitalization shock. The effects of financial deepening on inequality are only weakly positive and short-lived. Positive income shock tends to increase inequality but this effect is not robust to financial deepening measures. However, inequality is harmful for growth controlling for every financial deepening measure.

Keywords:

Economic growth, Inequality, Finance, Dynamic interactions, Panel VAR

Acknowledgments

We are grateful for the financial support we received from the Institute for Research in Finance and Economics of Seoul National University. We also appreciate the useful comments from the participants of the KDI JEP Conference and the suggestions from anonymous referees. We also thank Jaecheol Lee and Cena Choe for their assistance in organizing the data used in this study.

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