Title: Impact of financial development on income inequality: evidence from system dynamics approach

Authors: Syahrin Suhaimee; Mohd Azlan Shah Zaidi; Noorasiah Sulaiman; Jafri Zulkepli

Addresses: Socio Economic, Market Intelligence & Agribusiness Research Centre, Malaysian Agricultural Research & Development Institute, Serdang, Selangor, Malaysia ' Faculty of Economics and Management, Universiti Kebangsaan Malaysia, Bangi, Selangor, Malaysia ' Faculty of Economics and Management, Universiti Kebangsaan Malaysia, Bangi, Selangor, Malaysia ' School of Quantitative Science, College of Arts and Science, Universiti Utara Malaysia, Sintok, Kedah, Malaysia

Abstract: This paper examines the impact of financial development on income inequality from the dimensions of the banking sector and the stock market from 1970 to 2019 by utilising the system dynamics approach to analyse the dynamic feedback system of multiple variables. Results show that the banking sector development has higher impact on reducing income inequality than that of the stock market development. Although financial deepening has the highest impact on reducing income inequality towards 2050, the GDP output is lower than that of the GDP output in banking sector development. Thus, the growth in the banking sector is favourable compared to the improvement in other financial indicators. To achieve more equitable distribution of income and sustainable economic growth, both the government and the private sectors need to play their roles in providing better financial services to the people.

Keywords: income inequality; banking sector; stock market; financial activity; financial deepening; financial size; system dynamics; financial development.

DOI: 10.1504/GBER.2021.114658

Global Business and Economics Review, 2021 Vol.24 No.3, pp.225 - 247

Received: 26 May 2020
Accepted: 04 Sep 2020
Published online: 29 Apr 2021 *

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