Financial development and inequality : Brazil 1985–1994

Abstract

We examine the impact of financial development on earnings inequality in Brazil in the 1980s and first half of the 1990s. The evidence—based initially on time-series, and then on the relatively novel panel time-series data and analysis—shows that financial development had a significant and robust effect in reducing inequality during the period. We suggest that this is not only because the poorer can invest the acquired credit in either short or long-term productive activities, but also because those with access to financial markets can insulate themselves, via a process of financial adaptation, against recurrent poor macroeconomic performance, which is exemplified in Brazil by high rates of inflation. The main implication of the results is that a deeper and more active financial sector alleviates the high inequality seen in Brazil without the need for distortionary taxation.