Threshold Effects of Financial Inclusion on Income Inequality

Economic theory predicts an indeterminate (positive or inverse) relationship between financial inclusion and income inequality. We invoke a panel threshold model to investigate the possibility of a non-linear relationship between financial inclusion and income inequality, covering 106 countries. Our results show that financial inclusion reduces income inequality, but only up to a point, beyond which it does not reduce, and may even increase, inequality. Moreover, the effects of financial inclusion on the distribution of income vary across heterogeneous financial services and across countries at different stages of economic development