Financial development is one of the main sources of economic growth, whether financial deepening can lower the income inequality between urban and rural areas has been the focus of policy makers and researchers. Using data from 31 provinces in China, from 2002 to 2013, this paper examines the impact of financial deepening on income inequality between urban and rural areas. These empirical results show that financial deepening is significantly negatively associated with urban–rural income disparity, that is, for every 1% increase in financial deepening urban–rural income disparity can be reduced by about 0.5%. Further research has investigated that the influence of financial deepening on income disparity has a selective effect. From the decomposition effect of financial deepening, we also find that the proximity effect of the Eastern and Central regions is higher than that of the local effect, while the local effect of the Western region is higher than that of the Eastern and Central regions, but the proximity effect is not significant. The conclusion of this paper is of great significance to further deepen financial reform, improve the quality of financial development, and achieve sustainable development of economy.
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