The nexus inequality-finance, a new Gordian knot for economic policy?

Policy Study

Based on the existing literature, this paper aims at examining the two-way relationship between inequality and finance. Concerning the nexus inequality – finance, we find evidence supporting a direct causal link (a rise of credit demand as a result of high inequalities), and an indirect one (accommodative monetary policy and financial deregulation increasing credit supply, as a result of high inequalities); coincident factors (financial deregulation increasing simultaneously both inequalities and leverage) are not to be excluded either. We also report evidence showing the impact of financial development, financial deregulation and financial crises on income distribution. Despite the complexity of these various, intertwined linkages, the presumptions of a circular, self-reinforcing relationship between finance and inequalities are very strong, requiring urgent, adequate policy responses.

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