Investigating the Financial Kuznets Curve with Innovation in G7 Countries: An Augmented ARDL Approach A Time Series Analysis of Financial Development, Inequality, and Innovation in High-Income Countries

Abstract

This study explores the Financial Kuznets Curve (FKC) hypothesis in six G7 countries by incorporating innovation, measured through R&D expenditure, into the finance-inequality nexus. Using annual time series data and the augmented ARDL bounds testing approach, we examine long-run relationships among financial development, innovation, and income inequality. The results provide partial support for the FKC: France and the United Kingdom exhibit a significant inverted-U relationship between financial development and inequality, while no such pattern is found in the United States, Germany, Italy, or Japan. In contrast, innovation demonstrates a consistently significant and inequality-reducing effect across all countries. These findings suggest that innovation may moderate the distributional effects of financial development and highlight the importance of integrating financial and innovation policies to promote inclusive economic outcomes in advanced economies.