Financial deepening and income inequality: is there a financial Kuznetz curve in Latin America?

We investigate whether financial deepening improves income distribution and whether there exists a financial Kuznetz curve in Latin America. A fixed effect estimation is based on a newly compiled panel for 16 major Latin American countries, including recent data from 1990 onward but excluding the pandemic. The dynamic panel estimates, based on Driscoll-Kraay robust standard errors and dynamic GMM instrumental variable methodology, reveal that financial deepening worsens income distribution by increasing the Gini coefficient. At the same token, there exists a financial Kuznetz curve for the region implying initial worsening and then improvements in the income gap as the financial sector develops. Additionally, educational attainment, economic growth and level of output contribute to a reduction in inequality. In contrast, we find that FDI, exports and poverty rate exacerbate the income gap.