Does Urban-rural Income Gap Affect Financial Development in China

This article investigates the impact of urban-rural income gap on financial development in China by using data from 1980 to 2012. Income gap between the urban and the rural areas can be divided into two types: absolute income gap and relative income gap, and through co-integration test and the Granger causality test, both of them will affect financial development. Then we adopt a time-varying parameter state space model, Kalman filtered parameters reveal that both of absolute income gap and relative income gap have negative influence on financial development, and these influences are not constant but changing over time. The empirical result indicates that narrowing the urban-rural income gap will contribute to promoting financial development. The conclusion will play a proactive steering role in modern Chinese social reform and development.