Abstract:
Income inequality is an important economic issue faced by most of the developed
and developing countries. Many attempts have been made to identify a link between
economic growth and income inequality in Sri Lanka. But there is a lack of literature
available to identify a link between financial development and income inequality in Sri
Lanka. This paper basically investigates the effect of financial development on
income inequality in Sri Lanka with a new framework. This study attempts to analyze
the factors responsible for income inequality in Sri Lanka. In this study the Broad
money to GDP and Domestic credit to the private sector by banks as a share of GDP
are used to measure the direct impact of Financial Development and also used
Inflation and Government expenditure as other variables which affect income
inequality. This research presents the empirical evidences of Effect of Financial
Development on Income Inequality in Sri Lanka for the period of 1980-2012. The test
results also confirmed that there is a linear relationship between financial
development and Income inequality. And also this paper emphasized that there is a
positive relationship between Government expenditure and Income inequality.
