The Circular Relationship between Income Inequality and Finance: an Overview of the Recent Literature and Results

This article provides a synthetic survey of the recent literature addressing the links between income inequality and finance, in order to disentangle the various factors underlying the two-way relationship between these two variables. On the one hand, the literature does not provide decisive conclusions concerning the sign of the distributional impact of financial development, financial deregulation and financial crises, the institutional context appearing crucial. On the other hand, there has been recently strong and increasing evidence of a causal positive link running from inequality to (household) credit. Several theoretical mechanisms related to credit supply or demand may provide rationalizations for these results. In this regard, the causal impact seems stronger when middle-classes are concerned. Policy implications are substantial, and several avenues for future research are to be considered.