The impact of financial development on income inequality: The case of Turkey

In order for the financial system to effectively direct the resources in the national economy, the asymmetric as well as the symmetric effect of financial development on income distribution should undoubtedly be focussed. A review of the empirical literature reveals that most of the studies on income distribution implicitly assume that financial development shocks have a symmetric effect on income distribution. However, it has been observed that this assumption may not be valid for some reasons. Namely, factors such as the tendency of economic agents to hold cash, the fact that financial services are needed but the area of residence does not allow this, or that financial services or products are considered to be complex even though access to these facilities is possible, the lack of preference for the use of financial services due to religious, social or cultural structure, market conditions and incomplete information problems may cause the effect in question to be asymmetric. This asymmetry may be observed in the duration, magnitude or direction of the effect of financial development on income distribution. In addition, asymmetric effects may occur only in the short and long run, and it is also possible to observe asymmetric effects in both periods. The aim of this study is to investigate the symmetric/asymmetric effect of financial development on income distribution in Turkey in the short and long run. The data analysed in the study are annual and cover the period 1980-2022.As a result of five different models estimated for five different financial development indicators with linear and non-linear ARDL methods, it is found that financial development is a very important determinant in explaining income distribution. In addition, it is concluded that the effect of positive and negative shocks in financial development on income distribution differs, in other words, the effect of financial development on income distribution is asymmetric. It is thought that the asymmetric relationship may stem from the fact that while individuals in the low-income group are positively affected by financial development, those in the high-income group are not affected much, whereas both income groups are affected when financial development comes to a halt or regresses due to financial crises. This is because financial development facilitates financial literacy and access to financial opportunities, especially for low-income individuals. However, individuals in the high income group have these opportunities even before financial development. Keywords: Financial Development, Income distribution, Linear and Nonlinear ARDL.