The Impact of Financial Inclusion on Income Inequality: Case Study in Europe

Abstract

Financial inclusion is considered an important factor which contributes to reducing poverty and income inequality. A lot of previous researches showed the impact of some dimensions of financial inclusion on income inequality. However, financial inclusion is measured by many different dimensions; therefore, to assess the combined impact of financial inclusion on income inequality, the authors first used the principal components analysis to build a composite financial index, with the datasets from 29 high- and upper-middle-income countries in Europe in the period of 2011-2017. Next, the authors used the two-stage least squares (2SLS) regression method to estimate the impact of financial inclusion on income inequality. The research results found that the financial inclusion, the percentage of the population aged 25 and over graduating from secondary education, the economic openness had an opposite effect on income inequality. On the contrary, the employment-to-population ratio had a directional effect on income inequality. Based on the obtained estimates, the study proposed some solutions to reduce income inequality.