Financial development threshold effect on wealth inequality-economic growth nexus: Evidence from MENA economies

Abstract

This paper investigates the impact of the threshold effect of financial development on the relationship between wealth inequality and economic growth of 13 Middle East-North African (MENA) countries between 1995 and 2019. Applying the fixed-effect threshold panel model introduced by Hansen (1999), we test for a non-linear association between wealth disparity and economic output below and above a threshold value of financial development. The results show that wealth inequality inhibits economic expansion regardless of the level of financial development. Besides, this destructive impact intensifies with increased financial development. Our findings highlight that the rise in the wealth gap especially accompanied by accelerating financial reforms hurts economic growth. The findings of our research provide useful implications for the MENA region. Policymakers should reduce inequality of patrimony by adopting wealth tax to achieve a more equitable capital distribution. Furthermore, governments must adjust the financial development process to make it consistent with wealth equalizing policies and sustainable growth.