The ATM Around the Corner - How Financial Development, Access, and Integration Influence Economic Growth and Inequality

Abstract

The macroeconomic analysis of income inequality often rests on common driving factors such as globalization, demography, technological progress, or human capital accumulation while financial development and the structure of the financial sector are overlooked. However, well-developed and decentralized financial systems are widely spread across an economy with high numbers of bank branches and are readily accessible for economic agents. By pooling savings and acting as delegated monitors, banks improve the credit allocation on a microeconomic level in such a way, that even people without an initial endowment of wealth can overcome financing. By means of system GMM regressions, we use a worldwide and micro-based data set to show that financial development and liberalization through a higher number of ATMs, bank accounts, and bank branches increases economic growth and reduces income inequality. Especially in the short-run, lower parts of the income distribution benefit from such financial development.

Keywords: Financial Development, Financial Liberalization, Economic Growth, Income Inequality

JEL Classification: D63, E42, E44, G21, O11, O16, O42, O44