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

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 NMS11
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.