This article examines whether the direction of the effect of inequality on private credit depends on the capital constraints of individual countries, as predicted by Balmaceda and Fischer (2010). Consistent with the model’s predictions, we find that greater income inequality leads to a higher ratio of private credit to GDP in economies with low incomes and weak legal rights, whereas the reverse is true in economies with high incomes and strong legal rights.

JEL classification: F34; G15; G21; G38.

Ronald Fischer

Diego Huerta

Patricio Valenzuela

Keywords: Financial development, Inequality, Legal rights, Private credit.