Title: Is financial integration driver of income inequality? A panel co-integration analysis in Europe

Authors: Mehmed Ganić

Addresses: Faculty of Business and Administration, International University of Sarajevo, Sarajevo, Bosnia and Herzegovina

Abstract: Research on income inequality and finance has become an increasingly popular research area in the post-crisis period. Fully modified (FMOLS) and dynamic OLS (DOLS) co-integrated regression models are employed to empirically explore and estimate the long run co-integration vector for non-stationary panels between 2000 and 2016. The study finds that a NMS-11 with relatively lower integrated international financial flows experience lower levels of income inequality than older EU-15 members that have more integrated international financial flows. These countries experience greater levels of income inequality. Financial development generally leads to decreased income inequality in the whole sample and the NMS-11, whereas the results are mixed for the old EU-15 members. The study recommends government policies, especially in NMS-11 countries and European transition countries, that prioritise further financial market reforms (credit and stock markets) and greater financial freedom and minimise government interference that are vital to development of financial sector and thus economic growth.

Keywords: income inequality; financial integration; panel co-integration; European countries.

DOI: 10.1504/IJEPEE.2021.111950

International Journal of Economic Policy in Emerging Economies, 2021 Vol.14 No.1, pp.66 - 84

Received: 30 Sep 2019
Accepted: 27 Feb 2020
Published online: 21 Dec 2020 *

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