Examination of the relationship between financial development and income inequality in Turkey

One of the fundamental problems faced by economies is income inequality. Reducing income inequality and ensuring fairness in income distribution are among the primary responsibilities of policymakers. In this context, it is essential for policymakers to develop effective and sustainable policies aimed at reducing income disparities. The formulation of such policies first requires the accurate identification of distortions in income distribution. Determining deviations in income distribution at the regional and sectoral levels allows for the formulation of well-designed policy decisions to achieve a fairer distribution of income. Recent studies have revealed that income inequality is more pronounced particularly in regions with low levels of financial development. This finding indicates that financial development has a significant influence on income inequality. In this regard, it is of great importance to examine the extent to which the structure, functioning, and level of development of the financial system affect inequalities in income distribution. This study aims to analyze the effects of financial development on income inequality in Turkey using data for the period 1987–2021. The empirical analysis of the research is based on time series methods. In this context, the structural break unit root test developed by Lee and Strazicich (LS, 2003) is first applied, followed by the ARDL bounds testing approach to investigate long-term relationships. The findings reveal that despite the increase in financial development over time in Turkey, no significant reduction in income inequality has been achieved. According to the results of the analysis, increases in economic policy uncertainty, GDP per capita, and globalization have been found to have an inequality-widening effect.