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Financial Development and Income Inequality: Does Inflation Matter?

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  • Florence Barugahara

Abstract

Inflation reduces the ability of financial intermediaries to improve resource allocation. Therefore, this study examines whether the effect of financial development on income inequality ceases as inflation rate rise. The study uses dynamic panel data of 60 countries over a period of 1980-2009 and applies a system GMM estimator. The results show that financial development reduces income inequality. Nevertheless, the gains from financial development are offset by inflation. As inflation becomes severe, financial development ceases to reduce income inequality. This is because high inflation levels intensify credit rationing through reduction and greater variability of real returns. Consequently the financial sector makes few loans, resource allocation becomes ineffcient, and intermediary activity declines with adverse implications for income inequality. The results are robust to different measures of financial development.

Suggested Citation

  • Florence Barugahara, 2012. "Financial Development and Income Inequality: Does Inflation Matter?," Applied Economics Quarterly (formerly: Konjunkturpolitik), Duncker & Humblot, Berlin, vol. 58(3), pages 193-212.
    • Handle: RePEc:aeq:aeqaeq:v58_y2012_i3_q3_p193-212
    DOI: 10.3790/aeq.58.3.193
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    Cited by:

    1. Florence Barugahara, 2021. "Financial Inclusion in Zimbabwe: Determinants, Challenges, and Opportunities," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 12(3), pages 261-270, May.
    2. Kunofiwa Tsaurai, 2017. "Inflation Thresholds-Financial Development Nexus in South-Eastern Asian Emerging Markets," Journal of Economics and Behavioral Studies, AMH International, vol. 9(4), pages 14-24.

    More about this item

    Keywords

    income inequality; financial development; inflation;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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