VAR Framework for Financial Development and Income Inequality

摘要

This paper investigates the relationship between financial development and income inequality for the case of Wuhan city over the period 1993-2005. After considering the time series characteristics of the dataset, a multivariate vector autoregressive (VAR) framework is used as an appropriate specification and the long-run relationship among financial development, income inequality and other key factors is analyzed in a theoretically based high dimensional system by identification of co-integrating vectors through tests of over-identifying restrictions. Our results strongly support the view that financial development and income inequality are mutually causal, that is, causality is bi-directional. These findings suggest the need to accelerate the financial reforms to improve the efficiency of the financial system to stimulate saving/investment and, consequently, narrows the gap between the rich and poor within Wuhan.