The Income Inequality, Financial Depth and Economic Growth Nexus in China

16 Pages Posted: 7 Jun 2020

See all articles by Sharon Koh

Sharon Koh

Monash University - Sunway Campus

Grace Lee

Monash University - Sunway Campus

Eduard J. Bomhoff

affiliation not provided to SSRN

Date Written: February 2020

Abstract

Income inequality has increased in China despite rapid economic growth. Income inequality could impinge on future development, leading to social tension or political instability. Our study investigates the short‐run and long‐run relationship between three important macroeconomic indicators—income inequality, economic growth and financial depth. We utilise a two‐step procedure of ARDL bounds and Granger causality for the analysis. The bounds test indicates the presence of a cointegrating relationship between income inequality, financial depth and economic growth in the long run. In the second step, we utilise the Granger causality approach. Results show a bidirectional causality between financial depth‐growth and a unidirectional causality between inequality‐growth in the short run. In the long run, results reveal that growth and financial depth determine Gini. Our findings provide support for the inequality‐widening effect due to economic growth and higher credit provided to the private sector. We find no evidence of inequality‐narrowing or income‐equalising effect in the long run for the period of study. It is possible that the government's inclusive growth policies which started less than a decade ago have not taken effect for us to capture the inverted U‐shape income equalising effect significantly.

Keywords: ARDL Bounds, Granger causality, Income inequality, Financial Depth, Economic Growth

Suggested Citation

Koh, Sharon and Lee, Grace and Bomhoff, Eduard J., The Income Inequality, Financial Depth and Economic Growth Nexus in China (February 2020). The World Economy, Vol. 43, Issue 2, pp. 412-427, 2020, Available at SSRN: https://ssrn.com/abstract=3620969 or http://dx.doi.org/10.1111/twec.12825

Sharon Koh (Contact Author)

Monash University - Sunway Campus ( email )

Jalan Lagoon Selatan
Selangor Darul Ehsan
Bandar Sunway, 46150
Malaysia

Grace Lee

Monash University - Sunway Campus ( email )

Jalan Lagoon Selatan
Selangor Darul Ehsan
Selangor, 46150
Malaysia

Eduard J. Bomhoff

affiliation not provided to SSRN

No Address Available

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