Financial Development and Income Inequality in China: An Application of SVAR Approach

This paper studies the relationship of financial development and income inequality in China over the period of 1978-2013. Using the structural vector auto-regression (SVAR), the empirical results are consistent with the G-J hypothesis of an inverted U-shaped relationship between financial development and income inequality. An economy in its initial stages of financial development would present increasing inequality and only in a second or even third stage of development would inequality actually decrease. The evidence is valid for two indicators defined to measure the scale and the efficiency of financial development, respectively. Financial reform aimed at forming an appropriate financial system should be accelerated to help to reducing income inequality in China.