The impact of financial development on income inequality in the Russian regions

Abstract

This paper examines the factors of income inequality, among which financial development is under the spotlight. The degree of financial sector development determines ease of borrowing for population and their access to higher education, impacts entrepreneurial activity. Mixed empirical implications on the link between finance and inequality and lack of research conducted for the Russian regions explain the motivation of this paper. Regional financial system is characterized by financial depth indicators, a ratio of consumer credit to regional GDP and of consumer deposits to regional GDP along with the statistics on opened bank accounts. Estimations obtained using a panel dataset and models with different dependent variable provide evidence that the level of development of the financial sector has a significant impact on income inequality in the Russian regions. The empirical implications suggest that inequality tends to be positively associated with the volume of consumer loans. Nevertheless, increased placement of consumer deposits and improvement in bank infrastructure cause reduction in income inequality.