Financial Market Integration and Income Inequality

Abstract

Over the past decades, financial markets have been integrated across countries while income inequality has increased in most countries. This paper studies the effect of financial market integration on income inequality and investigates whether this effect varies with the degree of financial market development. We find empirical evidence that financial market integration and financial market development interact to change income inequality. Specifically, the effect of financial market integration on income inequality is nonlinear, and the degree of financial market development plays an important role. Opening financial markets worsens income inequality in the countries holding the underdeveloped state of financial markets, however, the effect of capital account openness on income inequality is statistically insignificant in the countries with developed financial markets.

Keywords: Financial Market Development, Financial Market Integration, Income Inequality

JEL Classification: F36, D63, O11