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

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.