Financial Deepening and Income Inequality in Indonesia

Abstract

The research aims to determine the relationship between financial deepening and income inequality in Indonesia. This research applied vector error correction model analysis by using time series data to show the long-term and short-term relationship between financial deepening indicators and income inequality. The research utilizes quarter time-series data from 2000 to 2016. The findings show that the higher ratio of money supply to GDP will increase income inequality in the long run. The development of the stock market has a positive impact on people in higher economic level so it increases the income inequality in the short run, while in the long run, a better financial market will reduce income inequality because all levels of economy can enjoy the benefit of its development. The ratio of private sector credit to GDP has a negative impact on the Gini ratio only in the short run. It can be concluded that financial deepening significantly affects the Gini ratio in Indonesia but government must decide which part of the financial deepening needs to be triggered in short run or which one in long run to improve income equality because better income equality will promote economic growth and welfare.

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