This paper assesses the impact of financial liberalization on income inequality. By applying the pooled mean group (PMG) estimator of Pesaran et al. (1999) to a panel of data consisting of up to 58 countries over 1973-2005, this study finds that financial liberalization will worsen income distribution in the long run. Furthermore, it also shows that the distributive impact of financial liberalization on inequality varies in different regions, with a positive and statistically significant (long-run) relationship between financial liberalization and income inequality being found in the advanced, Latin American, and other country groups, but with no such relationship being found for emerging Asian countries. Finally, liberalization in the banking system seems to help reduce income inequality in advanced countries, but not in the less advanced country group. Moreover, liberalization in capital markets consistently worsens income distribution in both country groups.
