Financial Instability and Inequality Dynamics in the WAEMU

Thierno Thioune

doi:10.33119/ERFIN.2017.2.1.3

Thierno Thioune Faculty of Economic and Management Sciences, Cheikh Anta Diop University of Dakar, Senegal

DOI: https://doi.org/10.33119/ERFIN.2017.2.1.3

Keywords: Financial Instability, Inequality, SIFI, PVAR, Impulse Response Function, WAEMU

Abstract

This article assesses the effect of financial instability on income inequality and vice versa. The methodology used in this article is based on two approaches: the construction of the synthetic index of financial instability (SIFI) and the panel vector autoregressive (PVAR) approach. The results obtained help to explain that the disparity of income in a West African Economic and Monetary Union (WAEMU) country in each year negatively influences the stability of the financial sector the following year. Functions of impulse responses show that a shock to financial stability has a negative effect on itself and leads to a stable situation after seven periods. A rise in income inequality in WAEMU countries tends to mitigate financial instability at first, before boosting a higher level of instability. Following this increase, inequality will decline, but at a very slow pace.

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