The Relationship Between Financial Development and Income Inequality: A Fourier Approach in the Case of Türkiye

While financial development is recognized as the driving force of economic growth, income inequality is a significant concern regarding social justice and sustainable development. The relationship between these two concepts can directly affect countries' economic policies and social balances. Therefore, the deepening and expansion of financial systems may create injustice in income distribution, but it also has the potential to reduce inequalities when appropriately managed. This study aims to determine the long-run impact of financial development on income inequality in Türkiye. For this purpose, the data set for the variables covers the period 1991-2022 and consists of annual observations. Income inequality (Gini coefficient) is used as the dependent variable, and the financial development index is used as the independent variable. In the study, the stationarity of the variables was tested with the Fourier unit root test (FKPSS) and KPSS unit root test. After the determination that the variables were not stationary at their level values, the Fourier cointegration test was used to test the existence of a long-run relationship between the variables. The study found that there is a cointegration relationship between financial development and income inequality in Türkiye. After establishing the co-integration relationship, our long-run DOLS estimation revealed a statistically significant negative relationship between financial development and income inequality at a 1% confidence level. The key conclusion drawn from this is that increases in financial development lead to reduced income inequality. This result underscores the potential impact of increasing financial development on reducing income inequality, and the importance of efforts and policies.