The role of financial development in the relationship between income inequality and economic growth in Iran

Farahati, Mahboobeh; Salimi, Leyla

doi:10.48308/jep.2024.235312.1172

The role of financial development in the relationship between income inequality and economic growth in Iran

Document Type : Original Article

Authors

Mahboobeh Farahati ¹
Leyla Salimi ²

¹ Assistant Professor of Economics, Department of Economics, Semnan University, Semnan, Iran

² Ph.D. Student in Economics, Department of Economics, Semnan University, Semnan, Iran

10.48308/jep.2024.235312.1172

Abstract

The aim of this paper is to investigate the effect of financial development on the relationship between income inequality and economic growth in Iran using data from 1984 to 2020. To achieve this goal, real GDP per capita and Gini coefficient are used as indices of economic growth and income inequality, respectively. The results of the cointegration analysis based on the autoregressive distributed lag (ARDL) approach reveal that in the long run, there is an inverted U relationship between economic growth and income inequality, thus confirming the Kuznets curve hypothesis. Additionally, the findings indicate that higher financial development lowers the per capita income level at which income inequality reaches its maximum. In other words, an increase in financial development causes a leftward shift of the Kuznets curve. Also, according to the results government size and trade openness increases income inequality, while the effect of urbanization rate on income inequality is negative.

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