Financial Development and Income Inequality in Iran’s Economy: Non-linear Error Correction Approach

Document Type : Research Article



Financial markets are the head of economic systems and the center of decision-making. If these markets face failure, functioning of the economic system will suffer as a whole. This study investigates the long-run relationship (threshold co-integration) of financial development with income inequality in the Iran’s economy for the period 1971 to 2011. The results indicate that there is threshold co-integration among the variables and the results of TVAR.LR test show that the model has only one threshold. Also, the results suggest that financial market development increases income inequality till a particular threshold value. After this, threshold value decreases income inequality. A threshold of financial development is necessary to reduce income inequality. Also, speeds of adjustment before and after threshold value are 41% and 80% respectively. The adjustment speed will increase after reaching the threshold value and in each period 80 percent of non-equilibrium is adjusted in the next period after threshold value.