Nonlinear Impact of Income Inequality on Economic Growth: The Role of Financial Development

This paper examines the nonlinear impact of income inequality (II) on economic growth (EG) across 16 low financial development countries (LFD) and 14 high financial development countries (HFD) during the period 2005-2022. Utilizing a Bayesian approach, the results reveal that II positively influences EG in both groups of countries, with average coefficients of 0.066 for LFD countries and 0.1031 for HFD countries. The probability of a positive impact in LFD countries is 93.34%, whereas it is 99.47% in HFD countries. When considering the threshold effect of II on EG, II exhibits a negative impact on EG with a probability of 63.76% in LFD countries and 73.16% in HFD countries. An inverted U-shaped relationship between II and EG is evident in both groups. Specifically, in LFD countries, this threshold is at a II level of 40.35; II stimulates EG up to this threshold, beyond which further inequality hinders EG. Based on these findings, the author proposes appropriate policy implications for both groups of countries.