The Channels of Monetary Shocks' Effects on Income Inequality in Iran: A TVP-FAVAR Model Approach

Document Type : Research Paper

Authors

Department of Economics, Semnan University, Semnan, Iran.

Abstract

Income inequality is one of the structural challenges of Iran's economy, and in recent decades, it has been exacerbated by significant fluctuations in monetary, exchange rate, and asset markets. From a theoretical perspective, monetary policy can affect income distribution through three main channels: the labor market, asset market, and credit channel. However, the intensity and direction of these effects are not constant over time in developing economies, necessitating a model that can reveal the dynamics of these changes. Therefore, the objective of this study is to investigate the mechanisms and magnitude of the transmission of monetary shocks on income inequality in Iran during the period from 1991 to 2025. The study employs the TVP-FAVAR model to enable the estimation of time-varying effects of monetary shocks, accounting for the large number of variables involved. The results indicate that the impact of monetary policies on income inequality in Iran is characterized by asymmetric features, time-dependence, and reliance on specific monetary transmission channels. Among the channels examined, the credit channel, particularly through liquidity growth and exchange rate fluctuations, plays a significant role in exacerbating inequality and generates persistent short-term responses. Additionally, the asset market channel is associated with an increase in the Gini coefficient and the expansion of income inequality, although its impact is relatively smaller than that of the credit channel. In contrast, the labor market channel has the least effect on income distribution, only causing minor and temporary deviations in the pattern of income inequality.

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History

  • Receive Date: 23 November 2025
  • Revise Date: 05 January 2026
  • Accept Date: 06 January 2026

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