Reciprocity in bank regulatory reforms and income inequality: first evidence from a panel vector autoregression analysis
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Reciprocity in bank regulatory reforms and income inequality: first evidence from a panel vector autoregression analysis Lea Steininger1
· Michael Sigmund2
Received: 12 November 2018 / Accepted: 4 April 2019 © Springer-Verlag GmbH Germany, part of Springer Nature 2019
Abstract Our study examines the dynamics between variations in bank regulatory policies and the income distribution, using an IMF database of quantified measures for financial reforms as well as the Standardized World Income Inequality Database. The unbalanced panel comprises 36 developed countries and covers a period over three decades from 1973 to 2005. We assess the potential endogeneity between bank regulations and inequality via a panel vector autoregression model. Among the regulatory reforms, we consider the deregulation of securities markets, entry barriers, credit and interest rate controls as well as the extent of privatization, international capital flows and banking supervision. We are able to provide support for the hypotheses that (i) overall, abolishing bank regulations enhances inequality in income and (ii) higher levels in inequality encourage laissez-faire policies in the banking sector. Moreover, our results highlight the importance of examining each regulatory reform individually. In particular, we endorse a relaxation of entry barriers for financial intermediaries while promoting interest rate controls, capital account restrictions and deliberate government intervention in securities markets. Keywords Income inequality · Bank regulation · Financial reform · Panel vector autoregression
The opinions expressed herein are those of the authors and do not necessarily reflect those of the ECB, OeNB or the Eurosystem. Helpful suggestions by three anonymous referees, seminar participants at the OeNB, INET, and the ECB are gratefully acknowledged. Electronic supplementary material The online version of this article (https://doi.org/10.1007/s00181019-01693-6) contains supplementary material, which is available to authorized users.
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Lea Steininger [email protected]
Extended author information available on the last page of the article
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L. Steininger, M. Sigmund
1 Introduction The central theme of this article is the nexus of bank regulatory policies and inequality in income. Does income inequality decrease or increase in the course of financial liberalization? Which types of bank regulations disproportionately affect the poor, and in what way? What are the various influences underlying the two-way relationship between bank regulatory policies and inequality, and how can we disentangle them? These are rather fundamental questions in the aftermath of the 2008 global financial crisis and in times of both ongoing financial globalization1 and income disparities last seen in the 1920s (Piketty and Saez 2014). However, due to the pressure of strongly held opinions and a general lack of data on the field, very little academic research has dealt with them in a systematic way, leaving substantial literature gaps. Our paper aims
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