The Effect of Financial Development on Income Inequality in the Iran’s Economy Using Non-linear Cointegration Technique

Document Type: Original Research


1 Professor of Economics, University of Shahid Chamran, Ahwaz, Iran

2 Ph.D. of Economics, University of Persian Gulf, Bushehr, Iran

3 Ph.D. of Economics, University of Shahid Chamran, Ahwaz, Iran


Different theories have different predictions about the relationship between financial development and income inequality that leads to two broad categories of thought with two conflicting theoretical hypotheses. This study examines the effect of financial development on income inequality in the Iran’s economy by using a Threshold Error Correction Model (TVECM) form 1971 to 2013. The results of TVAR.LR test show that the model has only one threshold. The results of the TVECM.Seo and TVECM.HS tests represent a threshold cointegration between the variables. Also, the results of Threshold Error Correction equation indicate that before reaching the threshold value, an increase in financial development causes increases in the Gini coefficient. But after reaching the threshold value, financial development reduces income inequality (decreases Gini coefficient) in the Iran’s economy.


Ang, James, B., (2010). Finance and inequality: the case of India. Southern Economic Journal 76, 738–761.
Asari, Abbas, Nseri, Alireza, Aghaei, Majid, (2009). The effect of financial development on poverty and inequality in OPEC Countries, Journal of Economic Research (Persian), No. 9, pp. 29-51.
Balke, Nathan S & Fomby, Thomas B, (1997). Threshold Cointegration. International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(3), pages 627-45, August
Bec, F., M. B. Salem, and M. Carrasco (2004): “Tests for Unit-Root versus Threshold Specification with an Application to the Purchasing Power Parity Relationship,” Journal of Business & Economic Statistics, 22, 382–395.
Beck, Thorsten, Demirgüç-Kunt, Asli, Levine, Ross, (2007). Finance, inequality and the poor. Journal of Economic growth 12, 27–49.
Bittencourt, Manoel. and Meyer, F.(2006). Financial Development and Inequality: Brazil 1985-99, Department of Economics, University of Bristol, Discussion Paper No. 06/582.
Claessens, Stiji, Perotti, Enrico, (2007). Finance and inequality: channels and evidence. Journal of Comparative Economics 35, 748–773.
Clarke, George, G., Xu, Lixin, C., Zou, Heng-Fu, (2006). Finance and income inequality: what do the data tell us? Southern Economic Journal 72, 578–596.
Frimpong, Joseph. Marbuah George (2010). The Determinants of Private Sector Investment in Ghana: An ARDL Approach, European Journal of Social Sciences – 2010, Volume 15, Number 2.
Galor, Oded, Zeira, Joseph, (1993). Income distribution and macroeconomics. Review of Economic Studies 60, 35–52.
Greenwood, Jeremy, Jovanovic, Boyan, (1990). Financial development, growth, and the distribution of income. Journal of Political Economy 98, 1076–1107.
Hansen, B. and Seo, B. (2002). Testing for two-regime Threshold Cointegration in Vector Error Correction Models, Journal of Econometrics, 110, pages 293 – 318.
Hansen, Bruce E. (1999). Threshold Effects in Non-Dynamic Panels: Estimation, Testing and Inference. Journal of Econometrics 39, 345-368.
Hansen, Bruce E. (2000). Sample Splitting and Threshold Estimation. Econometrica. Journal of Econometrics 68(3), 575–603.
Hansen, Bruce E., (1996). Inference When a Nuisance Parameter is Not Identified Under the Null Hypothesis. Econometrica 64, 413–430.
Kim, D-H., Lin., S-C., (2011). Nonlinearity in the financial development and income inequality nexus. Journal of Comparative Economics, 39, 310-325.
Kim, D-H., Lin., S-C., (2011). Nonlinearity in the financial development and income inequality nexus. Journal of Comparative Economics, 39, 310-325.
Levine, Ross, Loayza, Norman, Beck, Thorsten, (2000). Financial intermediation and growth: causality and causes. Journal of Monetary Economics 46, 31–77.
Pippenger, M. K., and G. E. Goering (2000): “Additional Results on the Power of Unit Root and Cointegration Tests under Threshold Processes,” Applied Economics Letters, 7(10), 641–44.
Seo, M. H. (2008): “Unit Root Test In A Threshold Autoregression: Asymptotic Theory And Residual-Based Block Bootstrap,” Econometric Theory, 24(06), 1699–1716.
Seo, M. H. (2009) Estimation of nonlinear error-correction models, Working paper.
Seo, Myunghwan, (2006). "Bootstrap testing for the null of no Cointegration in a Threshold Vector Error Correction Model," Journal of Econometrics, vol. 127(1), pages 129-150, September.
Tayyeb Nia, Ali, Zarei, Abbas, Yari, Hamid, (2010). The effect of financial development on income inequality: case study Middle East and North Africa countries, Journal of Economic Policy (Persian), No. 6, pp. 137-154.
Townsend, Robert, M., Ueda, Kenichi, (2006). Financial deepening, inequality, and growth: a model-based quantitative evaluation-super-1. Review of Economic Studies 73, 251–293.