Threshold Effect of Inflation on Income Inequality: Smooth Transition Regression (STR) Model

Inflation is one of the most important factors in income inequality that its effects are vague and unclear theoretically and empirically. In this regard, present study attempted to examine the non-linear impact of inflation on income inequality in Iran. For this purpose, the Smooth Transition Regression (STR) and annual data from the period 1969-2013 have been used. The estimated Smooth Transition Regression (STR) model supports a nonlinear threshold behavior in the relationship between inflation and income inequality in the country in the structure of two regimes with a threshold level of about 14.68 percent. So that long-run inflation rate in the first regime had a negative impact on income inequality in the country, while in the second regime this effect is positive. Therefore hypothesis of a U-shaped effect of inflation on income inequality has been confirmed in the Iranian economy.