Effects of Banking Sector Productivity on Income Distribution: Theory and Evidence

Elçin M. F.

Eighth International Conference on Economics (IceTea2022), Nevşehir, Turkey, 1 - 04 September 2022, pp.51

  • Publication Type: Conference Paper / Summary Text
  • City: Nevşehir
  • Country: Turkey
  • Page Numbers: pp.51
  • Dokuz Eylül University Affiliated: No


Distribution of income has always been one of the most popular research topics and it has been the main focus of policy makers since it reflects the well-being of the society. The extant theoretical literature argues that equal distribution of income can be accomplished by financial development. This study formalizes the idea of more productive banking sector induces more equal distribution of income in a dynamic general equilibrium model and shows that the implication of the model is supported by the cross-country data. It is argued in the model that the bank with perfect productivity can transform all deposits into loans. Deterioration of the banking productivity increases the labor cost of transforming all the deposits into loans and widens the gap between borrowing and lending interest rates. In this context, the positive relationship between capital stock and banking productivity is also demonstrated in the model. The model propounds that the ratio between the incomes of two individuals with different wage rates as a measurement of income inequality increases with the decrease of banking productivity parameter because the increase of capital stock brings two incomes closer together.

Keywords: Dynamic General Equilibrium Model, Financial Intermediation, Income Inequality.

JEL Codes: D63, E13, G20,.