Analyzing the Role of Macroeconomic Instability on Income Inequality in Iran

Abstract

Since income inequality can affect individuals’ lives economically, socially, and environmentally, analyzing variables influencing income inequality is of great importance. Considering the fact that studies in Iran underestimate the role of the asymmetric macroeconomic instability on income inequality, this study attempts to analyze the asymmetric effect of macroeconomic instability on income inequality in Iran. To this aim, a non-linear autoregressive distributed lags model has been used over the period 1971-2018. The results indicate that in both symmetric and asymmetric models, macroeconomic instability has a direct effect on income distribution. It means that based on the asymmetric model, increases in macroeconomic instability raise the income inequality (unfavorable effect), and decreases in it reduce the income inequality (favorable effect). In terms of effect size, decreases in macroeconomic instability affect income inequality more than increases in it. In addition, in both asymmetric and symmetric models, an increase in direct tax or energy price reduces the income inequality, while an increase in indirect tax raises income inequality. Furthermore, the Kuznets hypothesis is not rejected in this study.

Keywords

• income inequality
• macroeconomic instability
• asymmetric approach
• iran