The Effects of Macroeconomic and Financial Development on Income Inequality: Evidence from the Western Balkans

Abstract Using data from 1996 to 2019 covering five Western Balkan countries and applying the linear panel data estimation method, this paper examines the effect of macroeconomic indicators and financial market development on income inequality. Regression results with Driscoll-Kraay standard errors demonstrate that income per capita increases income disparities. Theoretically, there are grounds for both a positive and negative relationship between economic growth and income inequality. In addition, contrary to prevailing literature, our analysis finds no significant impact of financial market development on income inequality, while the rule of law is found to have no effect on income inequalities in these countries. We depart from previous literature by bringing new evidence on the relationship between income inequality and economic growth in the specific context of Western Balkan countries. We study this relationship in an integrated framework and rely on a larger time span, both of which are seemingly important for comprehending the income inequality-economic growth nexus. Certainly, the obtained results bear important policy implications as discussed in this paper.