The Relationship between Financial Developments and Income Inequality in Iran

This study examines the relationship between financial development and income inequality in Iran using bounds testing approach over the period of 1973-2010. In this study the domestic credit to private sector (% of GDP) and the ratio of liquidity to GDP are applied as proxies for financial development. The empirical results indicate that a negative and linear relationship between financial development and income inequality exists. Financial development significantly reduces income inequality in Iran. However, there is no evidence of an inverted U- shaped relation between financial development and income inequality, as suggested by Greenwood and Jovanovic (1990). The empirical findings also suggest that the enhanced institutional quality results in reduced income inequality in Iran.