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Income inequality, inflation and financial development

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  • Kim, Dong-Hyeon
  • Lin, Shu-Chin

Abstract

The paper examines empirically whether financial development shapes the relationship between inflation and income inequality. This is motivated by the observations that while financial development provides an insurance mechanism against inflation risk, high and volatile inflation distorts information flows and interferes with the resource allocation of the financial sector. Thus, the distributional consequence of inflation may hinge on how inflation and financial development interact with each other, i.e., condition on financial development. In a sample consisting of both developed and developing countries, it finds that income inequality is positively associated with inflation but negatively correlated with the interaction between inflation and financial development. Inflation raises income inequality and financial development moderates this adverse effect. The evidence suggests that promoting financial development would attenuate the unfavorable effects of inflation on income distribution.

Suggested Citation

  • Kim, Dong-Hyeon & Lin, Shu-Chin, 2023. "Income inequality, inflation and financial development," Journal of Empirical Finance, Elsevier, vol. 72(C), pages 468-487.
    • Handle: RePEc:eee:empfin:v:72:y:2023:i:c:p:468-487
    DOI: 10.1016/j.jempfin.2023.04.008
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    More about this item

    Keywords

    Inflation; Income distribution; Financial development; Fiscal redistribution;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration

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