Document Type : Research Article
Authors
1
Assistant Professor,Associate Professor, Department of Economics, Faculty of Humanities, Ayatollah Boroujerdi University, Boroujerd, Iran. Research group of Zagros Data Sciences, Ayatollah Boroujerdi University, Boroujerd, Iran.
2
Associate Professor, Department of Economics, Faculty of Humanities, Ayatollah Boroujerdi University, Boroujerd, Iran. Research group of Zagros Data Sciences, Ayatollah Boroujerdi University, Boroujerd, Iran.
10.22084/aes.2025.31450.3820
Abstract
Understanding the impact of financialization on the economy is crucial for policymakers seeking to design strategies that enhance social welfare. This study examines the effect of financialization on economic welfare in Iran from 1990 to 2023, employing a threshold regression approach to account for nonlinear dynamics. The results reveal a threshold level of institutional quality at 57%. Across both, i.e., low and high institutional quality regimes, financialization exerts a negative and significant influence on economic welfare. However, once institutional quality surpasses the threshold, the adverse impact of financialization intensifies markedly. Findings highlight the paradoxical role of institutional quality, showing that greater financialization consistently undermines welfare in Iran, with stronger institutions amplifying rather than mitigating its negative effects. It means that in environments with higher institutional quality, advanced financial instruments and capital markets develop; however, access to financial development is usually asymmetrical. Consequently, wealthy individuals and large corporations benefit the most, while low-income households receive minimal benefits and may even suffer from asset inflation or consumer debt. Thus, strong institutions do not necessarily prioritize public welfare. Policymakers may regulate to develop financial markets in a way that prioritizes the financial sector's profitability over social interests. This mechanism can lead to financial sector growth occurring faster than the real economy's capacity, ultimately undermining welfare. Therefore, considering the potential role of financial institutions in promoting growth and welfare, it is recommended that policymakers adopt appropriate policy measures such as channeling capital into the real economy and preventing the diversion of resources to unproductive activities; restricting short-term corporate behavior through instruments like taxes on share buybacks, mandatory transparency in reporting, and incentives for long-term investment; strengthening financial regulation and systemic risk management; clarifying legal frameworks, reducing information rents, and addressing unequal access in financial markets through public disclosure and anti-corruption regulations; revising the role of supervisory institutions; and enhancing international and regional cooperation to mitigate the adverse effects of sanctions. Such measures can help reduce the negative impact of financialization on economic welfare.
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