Financial development-income inequality nexus in South Eastern European countries: does the relationship vary with the level of inflation?

Abstract

The study investigated two aspects using panel data analysis methods: 1) the impact of financial development on income inequality; 2) the role of inflation in the financial development-income inequality nexus in the case of South Eastern European countries (Bulgaria, Greece, Croatia, Montenegro, Romania, Serbia, Slovenia). Without interaction term, fixed effects approach shows that financial development increased income inequality whereas pooled ordinary least squares (OLS) indicates that income inequality was narrowed down by financial development. Using fixed effects, the interaction term between inflation and financial development reduced income inequality. Employing pooled OLS approach, the interaction term between inflation and financial development increased income inequality. The study therefore urges South Eastern European countries to implement policies targeted at reducing inflation in order to enhance financial development's ability to reduce income inequality. South Eastern European countries should also implement policies aimed at deepening their financial markets in order to reduce income inequality.