Investigating the Relationship between Government Size and Income Inequality in Iran: The MS-VAR Approach

Document Type : Original Article

Authors

1 Assistant Professor of Economics, Department of Economics and Management, Institute for Humanities and Cultural Studies, Tehran, Iran

2 Associate Professor of Economics, Faculty of Humanities Sciences, Ayatollah Boroujerdi University, Boroujerd, Iran

Abstract

The relationship between government size and income inequality is a challenging issue in the public sector economics. Accordingly, this study investigates the relationship between government size and income distribution inequality using the Markov Switching Vector Auto-regression (MS-VAR) Model in the Iranian economy for 1969-2017 period. The findings confirm the view of Hamilton (1998) and show that the relationship between government size and income inequality is not a linear relationship in the Iranian economy, and time requirements have influenced it. In addition, the findings show that there was a positive unidirectional causal relationship from income inequality to government size in zero regime (during 1969-1983), while no causal relationship was observed between these two variables in regime one (during 1984-2017). In other words, the effort to improve the income distribution situation - along with the abundance of oil revenues - can be considered one of the factors of large government size in 1969-1983. Also, neither of the two regimes under study, the larger size of government has not led to an equal distribution of income in the Iranian economy.

Keywords

References

- Afonso, A., Schuknecht, L., & Tanzi, V. (2010). Income distribution determinants and public spending efficiency. The Journal of Economic Inequality, 8(3), 367-389.
- Alfonso, A., Schuknecht, L., & Tanzi, V. (2008). Income distribution determinants and public spending. European Central Bank. Working Paper n. 861.
- Allah Rezaee, A., Hosseinzadeh, D., Faramarzi, A. & Yazdan khah, M. (2014). The Impact of government size on income distribution in Iran. Quarterly Journal of the Macro and Strategic Policies, 1(4), 21-36 (In Persian).
- Alipour, M. S., Hakimipoor, N., Alahrezaee, A., Faramarzi, A., & Shabbak, A. (2016). The Effects of Government Size on Inequality in Iran. International Journal of Research and Reviews in Applied Sciences, 26(1), 20-25.
- Anderson, E., Jalles D'Orey, M. A., Duvendack, M., & Esposito, L. (2017). Does government spending affect income inequality? A meta-regression analysis. Journal of Economic Surveys, 31(4), 961-987.
- Aristei, D., & Perugini, C. (2014). Speed and sequencing of transition reforms and income inequality: A panel data analysis. Review of Income and Wealth, 60(3), 542-570.
- Bae, K. B. (2015). Income inequality and redistributive spending: Evidence from panel data of Texas counties. Local Government Studies, 41(5), 735-754.
- Bildirici, M. (2012). Economic growth and electricity consumption in Africa and Asia: MS-VAR and MS-Granger causality analysis. Available at SSRN 2129017.
- Blejer, M. I., & Guerrero, I. (1990). The impact of macroeconomic policies on income distribution: an empirical study of the Philippines. The Review of Economics and Statistics, 72(3), 414-423.
- Boustan, L., Ferreira, F., Winkler, H., & Zolt, E. M. (2010). Inequality and Local Government: Evidence from US Cities and School Districts, 1970-2000. In Law and Economics Workshop, Berkeley Program in Law and Economics, UC Berkeley.
- Christiano, L. J. (1992). Searching for a break in GNP. Journal of Business & Economic Statistics, 10(3), 237-250.
- Claus, E., & Claus, I. (Eds.). (2016). A Collection of Surveys on Savings and Wealth Accumulation. John Wiley & Sons.
- Dadgar Y. & Ghafari A. A. (2008). The analysis of the impact of income tax on income distribution in Iran. The Quarterly Economic Research Journal, 8 (3), 73-97 (In Persian).
- Dadgar Y. Nazari R. & Mehrabani F. (2008). The impact of fiscal policy and gas price shock on welfare and income distribution in Iran. Social Welfare Quarterly, 7(28), 129-150 (In Persian).
- Dadgar, Y., Nazari, R. & Siami Eraghi, E. (2013). Optimum government and tax in public sector economics and in Iran. Journal of Applied Economics Studies in Iran, 2(5), 1-27 (In Persian).
- De Mello, L., & Tiongson, E. R. (2006). Income inequality and redistributive government spending. Public finance review, 34(3), 282-305.
- Deschamps, Ph. J. (2008). Comparing smooth transition and markov switching autoregressive models of US unemployment. Journal of Applied Econometrics, 23 (4), 435-462.
- Doerrenberg, P., & Peichl, A. (2014). The impact of redistributive policies on inequality in OECD countries. Applied Economics, 46(17), 2066-2086.
- Dotti, V. (2020). Income inequality, size of government, and tax progressivity: A positive theory. European Economic Review, 121, 103327.
- Fallahi, F. (2011). Causal relationship between energy consumption (EC) and GDP: A Markov-switching (MS) causality. Energy, 36(7), 4165-4170.
- Fallahi, F. (2014). Money-output relationship in Iran: a Markov Switching causality. Journal of Applied Economics Studies in Iran, 3(11), 107-128 (In Persian).
- Finseraas, H. (2009). Income inequality and demand for redistribution: A multilevel analysis of European public opinion. Scandinavian Political Studies, 32(1), 94-119.
- Franses, P. H., & Van Dijk, D. (2000). Non-linear time series models in empirical finance. Cambridge University Press.
- Gouveia, M., & Masia, N. A. (1998). Does the median voter model explain the size of government? Evidence from the states. Public Choice, 97(1-2), 159-177.
- Granger, C. W. J., & Newbold, P. (1973). Some comments on the evaluation of economic forecasts. Applied Economics, 5(1), 35-47.
- Gujarati, D. N. (2009). Basic econometrics. Translated by Abrishami, H., Seventh edition, University of Tehran Press (In Persian).
- Hamilton, J. D. (1994). Time series analysis. Princeton: Princeton University Press.
- Jafari Samimi, A. (2012). Economic of the Public Sector (1). Eighth Edition, Samat Publications, Tehran (In Persian).
- Khodaparast, M. & Davoodi, A. (2012). Public Expenditures, Poverty and Inequality. Quarterly Journal of the Macro and Strategic Policies, 1(4), 37-50 (In Persian).
- Krolzig, H. M. (1997). Markov-Switching Vector Auto regressions. Modelling, statistical inference and applications to business cycle analysis. Springer, Berlin.
- Krolzig, H. M. (1998). Econometric modelling of Markov-Switching Vector Auto regressions using MSVAR for Ox. Institute of Economics and Statistics and Nuffield College, Oxford.
- Larcinese, V. (2007). Voting over redistribution and the size of the welfare state: the role of turnout. Political Studies, 55(3), 568-585.
- Lee, C. S. (2005). Income inequality, democracy, and public sector size. American Sociological Review, 70(1), 158-181.
- Luo, W., Pickering, A., & Monteiro, P. (2017). Inequality and the Size of Government. Discussion Papers in Economics, (17/02).‏
- Martinez-Vazquez, J., Moreno-Dodson, B., & Vulovic, V. (2012). The Impact of Tax and Expenditure Policies on Income Distribution: Evidence from a large panel of countries. Andrew Young School of Policy Studies Research Paper Series, (12-30).
- Meltzer, A. H., & Richard, S. F. (1983). Tests of a rational theory of the size of government. Public Choice, 41(3), 403-418.
- Milanovic, B. (1999). Do more unequal countries redistribute more? Does the median voter hypothesis hold? The World Bank.
- Milanovic, B., (2000). Do more unequal countries redistribute more? Does the median voter hypothesis hold? Eur. J. Political Econ. 16, 367–410.
- Moene, K. O., & Wallerstein, M. (2001). Inequality, social insurance, and redistribution. American Political Science Review, 95(4), 859-874.
- Mohagheghnia, M. J., Shahriari, H. R., Mir, M. & Akbari Bavafa Golian, A. (2014). Investigating the effect of government spending on income distribution in Iran with smooth regression model. Proceedings of the eighth Iranian Conference on Fiscal and Tax Policies, 217-197 (In Persian).
- Muinelo-Gallo, L., & Roca-Sagalés, O. (2013). Joint determinants of fiscal policy, income inequality and economic growth. Economic Modelling, 30, 814-824.
- Nademi, Y. & Hasanvand D. (2015). The threshold effects of government size on income inequality in Iran. Journal of Planning and Budgeting, 20(3), 125-143 (In Persian).
- Rodrı́guez, G., & Sloboda, M. J. (2005). Modeling nonlinearities and asymmetries in quarterly revenues of the US telecommunications industry. Structural Change and Economic Dynamics, 16(1), 137-158.
- Sánchez, Á. & Pérez-Corral, A. L. (2018). Government Social Expenditure and Income Inequalities in the European Union. Hacienda Publica Espanola/Review of Public Economics, 227(4), 133-156.
- Sherafat, M. & Negintaji, Z. (2010). The effect of macroeconomic policy on income distribution in Iran. Journal of Economics and Modeling, 1(2), 1-29 (In Persian).
- Ulu, M. I. (2018). The effect of government social spending on income inequality in OECD: a panel data analysis. International Journal of Economics Politics Humanities and Social Sciences, 1(3), 184-202.
- Zapata, H. O., & Gauthier, W. M. (2003). Threshold models in theory and practice. For presentation at the Southern Agricultural Economics Association Annual Meeting, Mobile, Alabama. (No. 1363-2016-107904).
Journal of Economics and Modelling
Volume 11, Issue 2 - Serial Number 42
September 2020
Pages 29-64

Files

Share

How to cite

Statistics