Year: 2012
Author: Barugahara, Florence
Applied Economics Quarterly, Vol. 58 (2012), Iss. 3 : pp. 193–212
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.
JEL Classification: G2, O11, E31
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Journal Article Details
Publisher Name: Global Science Press
Language: English
DOI: https://doi.org/10.3790/aeq.58.3.193
Applied Economics Quarterly, Vol. 58 (2012), Iss. 3 : pp. 193–212
Published online: 2012-07
AMS Subject Headings: Duncker & Humblot
Copyright: COPYRIGHT: © Global Science Press
Pages: 20