NEW EVIDENCE CONCERNING THE INEQUALITY – FINANCIAL DEVELOPMENT NEXUS IN ROMANIA. A COINTEGRATION APPROACH

Abstract

This paper revisits the ambiguous effect of financial development on income inequality in emerging countries by investigating the presence of cointegration between concepts in Romania. Since financial deepening seems to be beneficial in the income-disparities fight in advanced countries, opposite findings are found in the case of less developed or transition ones. Therefore, we employ a time-series model that accounts for inequality, financial deepening and economic growth as the main variables spanning more than 30 years of Romanian history. On average, a higher degree of financial development harms income distribution in the long term, while economic productivity manifests a non-significant influence on inequality. These outcomes are robust to other novel measures of finance that account for the global dimension of financial development: financial institutions, markets and private sector credits. To control for the potential bias of inequality’s transmission channels, we include a proxy for inflation in our specification. By capturing the impact of financial expansion on inequality in the presence of inflationary pressure, our results reflect the sensitivity of the low-income groups to this phenomenon. In this regard, policymakers should pay attention to inflation-targeting strategies to support the condition of poor individuals who often cannot take advantage of the benefits of financial development.