Examining the Effects of Real Interest Rate on Inequality in Different Income Deciles (Quantile Model Approach)

The purpose of this study is to investigate the effects of real interest rate on inequality in different income deciles in Iran. For this purpose, the current model was estimated with the quantile approach and based on the data of 1990-2020. Based on the estimation results, there is a positive and significant relationship between the real interest rate and income inequality in the study period, and as the share of income deciles increases, income distribution becomes more unequal. As such, the bottom 60 percent of the decile lose 0.05 percent of their income share in total, while the top 10 percent gain 0.16 percent, which indicates the transfer of income from the poor and middle-income groups to the rich ones. It should be noted that the top 10 percent receive income transfers from the bottom 60 percent as a result of the increase in interest payments. The effect of such income transfer can also be seen in the increase of the Gini index, because the Gini index increases by 0.10% as a result of the increase in interest payments. Therefore, this transfer of income increases income inequality at the expense of low- and middle-income groups, thereby reducing social welfare. According to the above-mentioned findings, it can be claimed that if the interest rate is increased by the monetary authorities, households with more savings will benefit more, while households with more debts will suffer a lot. This reveals that the result of such a decision will eventually cause income inequality. Thus, it is better to focus on stabilization and reduction of inflation, as well as inflation targeting policy, instead of the policy of excessive profit increase to prevent the transfer of the real interest rate from the poor to the rich.