Relationship between the shadow banking system and income inequality

Abstract

Regarding the evolution of most developed economies since the 1970s, two facts are well documented. First, power economies, particularly Anglo-Saxon economies such as the United States and the United Kingdom, have experienced a significant increase in income and wealth inequality [Stiglitz, 2015; Piketty, 2013]. Second, the financial sector expanded considerably, both in absolute and relative terms [Botta et al, 2021]. Regarding the latter, research has focused on an unprecedented expansion of financial activities, a rapid growth of financial profits, the influence of financial relations on the economy and society and their dominance [Lapavitsas, 2016], as well as a rapid development of new financial instruments [Hein, 2011]. Thus, the growth of the financial sector was accompanied by important changes in terms of its composition and modus operandi, such characteristics are framed, by some authors such as [Lapavitsas, 2016], as characteristic of the shadow banking system.

The fact that both the increase in income inequality and the growth and composition of the financial system occurred at similar times has motivated research that addresses the relationship between these variables, but this paper addresses some limitations of the current literature.