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

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.