Financial Inclusion, Institutional Quality, and Inequality: an Empirical Analysis

This study investigates the role of economic and political institutions in moderating the effect of financial inclusion on inequality. Using a variety of panel data models, five dynamic estimators, and data from 110 countries over the period 2004–2018, this paper documents a significant interaction between financial inclusion and institutions in determining the income inequality. The empirical results suggest that financial access can be strengthened by building effective institutions and that the effect of financial inclusion can be weakened if the institutional quality is poor. By performing a series of robustness checks, we confirmed these findings. The interactions of financial access with economic and political institutions are highly significant and positively associated with income equality. Hence, more policy formulation is required to tackle the problem of income inequality. Given the complementarity detected between financial inclusion and the institutional quality, an effective regulatory system and a healthy institutional framework should be ensured to improve financial access and to optimize the economic development.