Fiscal Shocks, Economic Growth, and Income Inequality in Iran: A DSGE Model Analysis with Emphasis on Human Capital

Document Type : Research Paper

Authors

1 Department of Economics, University of Isfahan, Isfahan, Iran.Department of Economics, Damascus University, Damascus, Syria.

2 Department of Economics, University of Isfahan, Isfahan, Iran.

3 Department of Economics, University of Isfahan, Isfahan, Iran.Department of Economics and International economic Relations, University of Aleppo, Aleppo, Syria.

Abstract

This study examines how tax shocks, government spending shocks, and government bond interest rate shocks impact economic growth and income inequality in Iran, emphasizing human capital as a mediating factor. We develop a New Keynesian DSGE model, incorporating households, firms, the foreign trade, the oil sector, the central bank, and the government. Using Bayesian methods and annual data from 2004 to 2023, we estimate model parameters to capture economic dynamics robustly. The results indicate that economic growth and income inequality are inversely related. Specifically, tax increases, spending cuts, and higher bond interest rates hinder growth, reduce human capital accumulation, and exacerbate inequality— highlighting the need for targeted fiscal reforms. To address these challenges, we propose three policy recommendations: First, broadening the tax base by enhancing compliance and formalizing the informal sector, rather than raising tax rates. Second, improving the efficiency of public spending by reallocating resources to high-impact sectors and replacing blanket subsidies with targeted cash transfers. Third, reducing reliance on high-interest bonds and shifting toward public-private partnerships (PPPs). By integrating these shocks into a DSGE model for Iran’s growth-inequality nexus, this study provides novel insights, underscoring the overlooked role of human capital in shaping economic outcomes.

Keywords

Main Subjects

References

Akbarian, R., & Famkar, M. (2010). The association between income inequality, education expenditures, and economic growth. Economic Growth and Development Research, 1(1), 161–185.
Ashrafi, S., Behbudi, D., & Dejpasand, F. (2018). Study of non-linear relationship between income inequality and economic growth: A case of Iran. Quarterl  y Journal of Applied Theories of Economics, 5(3), 21–42.
Calvo, G. A. (1983). Staggered prices in a utility-maximizing framework. Journal of Monetary Economics, 12(3), 383–398.
Das, A. (2007). Public-private partnerships for providing healthcare services. Indian Journal of Medical Ethics, 4(4), 174-175.
Farzanegan, M. R., & Krieger, T. (2017). The response of income inequality to positive oil rents shocks in Iran: Implications for the post-sanction period. MAGKS Papers on Economics, 201733.
Ghobaishavi, F., Akbari, A., Dadrasmoghadam, A., Safdari, M., & Sardar Shahraki, A. (2023). Relationship between Growth and Income Distribution - In Rural Areas of Iran With Spatial Panel Approach. Agricultural Economics Research, 15(Special Issue), 27-17.
Ghorbani M, Cheshomi A, Salimifar M, Nazari A. The Impact of VAT Shock on Iran's Economy; Price Stickiness Sensitivity Analysis with DSGE Model. J Tax Res 2021; 29 (50) :143-177
Hassanvand, D., & Khochiani, R. (2018). Income inequality and economic growth in Iran: A time-scale analysis. The Journal of Economic Studies and Policies, 5(2), 77–104.
Heidari, H., & Hassanzadeh, A. (2017). Investigating the relationship between income inequality and economic growth in Iran. Refah Journal, 16(63), 89–125.
Hoseini, M., Ahmadi Shadmehri, M. T. and Gorjipour, M. J. (2021). The Effect of Democracy on the Relationship between Economic Growth and Income Inequality in Iran. Quarterly Journal of Quantitative Economics (JQE), 18(1), 1-16.
Jani S. (2012). Economic Growth Resources and Income Distribution in Iran. refahj. 12(46), 247-296.
Junlin Mu, Lipeng Yan, & Shanshan Wu. (2022). Growing with inequality: A DSGE model with heterogeneous human capital and endogenous economic growth. Applied Economics.
Kazerooni, A., Asgharpur, H., & Tayyebi, S. (2020). The impact of slow economic growth on inequality of income distribution with emphasis on Thomas Piketty's hypothesis. The Economic Research, 20(1), 23–50.
Khiabani, N., & Amiri, H. (2012). Designing a dynamic stochastic general equilibrium (DSGE) model for an open economy to examine the impact of oil shocks on macroeconomic variables. Quarterly Journal of Quantitative Economics, 9(3), 25–59.
Kuznets, S. (1955). Economic growth and income inequality. American Economic Review, 45(1), 1–28.
Martinez Cotto, S. A. (2018). The effect of cash transfer programs on poverty reduction. Business and Public Administration Studies, 11(1).
Matsuyama, K. (2000). Endogenous Inequality. The Review of Economic Studies 67 (4): 743–759.
Mortazavi, S. A., Seraj Zadeh, F., & Shokohi, M. (2011). The relationship between income inequality and economic growth in urban and rural areas of Iran: Application of the Kuznets curve. Quarterly Journal of Agricultural Economics Research, 3(9), 165–180.
Motameni, M. (2015). The effect of economic growth volatility on income inequality in Iran: CCR approach. Journal of Economic Essays; an Islamic Approach, 12(23), 163–179.
Motevaseli et al. (2010). Designing a New Keynesian dynamic stochastic general equilibrium (DSGE) model for Iran as an oil-exporting country. Quarterly Journal of Economic Research, 4(1), 87–116.
Mousavi Jahromi, Y., Khodadad Kashi, F., & Moosapour Ahmadi, A. (2015). Evaluation of the factors affecting income inequality. Iranian Journal of Economic Research, 19(61), 117–147.
Nakhli, S. R., Rafat, M. , Bakhshi Dastjerdi, R. and Rafei, M. (2020). A DSGE Analysis of the Effects of Economic Sanctions: Evidence from the Central Bank of Iran. Iranian Journal of Economic Studies, 9(1), 35-70.
Nose, M., & Mengistu, A. (2023). Exploring the adoption of selected digital technologies in tax administration: A cross-country perspective (IMF Note No. 2023/008). International Monetary Fund.
Radfar, M. R., Zomorodiyan, G., & Karimkhani, M. (2020). Investigating the interactions of inequality income, employment and economic growth. Journal of Investment Knowledge, 9(33), Summer 2020.
Rezaghoizadeh, M. (2017). Investigating the Effect of Tourism on the Triangle of Poverty, Inequality and Economic Growth. Tourism Management Studies, 11(36), 125-160.
Sadeghi H, Basakha M, Shaghaghi V. (2009). Relation of Economic Growth with Poverty and Inequality in Developing Countries. refahj. 8(33), 27-44.
Samadi, A. H., Dehghan Shabani, Z., & Moradi Kouchi, A. (2015). Spatial analysis of the effect of income inequality on economic growth in Iran. Economic Growth and Development Research, 5(19), 57–72.
Yarbrough, B. V., & Yarbrough, R. M. (2006). The world economy: Trade and finance (7th ed.). South-Western College Pub.
Young, C. Edwin & Westcott, Paul C. & Hoffman, Linwood A. & Lin, William W. & Rosen, Stacey L., (1999). An Economic Analysis of A Food Security Commodity Reserve: Commodity Vs. Cash. American Agricultural Economics Association

Files

History

  • Receive Date: 05 April 2025
  • Revise Date: 10 June 2025
  • Accept Date: 11 June 2025

Share

How to cite

Statistics