Revisiting the Financial Development and Income Inequality Nexus: Evidence from Hungary - Acta Universitatis Sapientiae

Acta Univ. Sapientiae, Economics and Business, 11 (2023) 227–257

DOI: https://doi.org/10.2478/auseb-2023-0011

Abstract. The finance–inequality nexus has been a major topic of discussion since the 1990s and became even more so after the financial crisis of 2007–08. This paper aims to empirically investigate whether financial development and/or financial openness increased or decreased income inequality in Hungary over the period of 1971–2019. An empirical analysis of an autoregressive distributed lag (ARDL) model suggests the existence of long-run co-integration between the analysed variables.  Financial openness contributes to reducing Hungarian income inequality in the short run but fuels greater income inequality in the long run. Whereas the effects of financial development on inequality vary according to the indicators, the domestic credit by banks has a significant negative effect on inequality in the short and long run, while the impact of the credit to the private sector from all the sectors on inequality is insignificant.

Keywords:  financial development, income inequality, Hungary, ARDL