Short-term and long-run effects of income inequality on banking crisis in Iran; ARDL bounds approach

Ensuring social justice and eliminating poverty and deprivation by balancing the distribution of income and wealth among members of society is the focus of the constitution. Therefore, it is essential that the country's development strategies are based on rapid economic growth and reduction of financial and banking crises and equitable distribution of income, and planning and policy-making should be based on the above objectives. Among these, the two categories of banking crisis and income distribution have not been studied much in empirical studies, while due to the contradiction and incompatibility between income inequality and increasing bank debt and its effects on the banking crisis as one of Reducing variables of economic growth, it can be said that increasing income inequalities can exacerbate the banking crisis.The banking sector in Iran, due to government support never have encountered phenomena such as bank turmoil and bankruptcy, but have always been accompanied by a fraction and signs of crisis, and even in years recent crises have been shown in some financial institutions. Considering the economic and social effects of income distribution on the improvement of social welfare and its relation to financial crises, including banking crisis, this study attempts to study the effects of income inequality on the banking crisis in Iran during the period of 1980-2019. In this regard, the Gini coefficients variables for income inequality index and ratio credits to GDP are used for the banking crisis index as well as by the use of Autoregressive Distributed Lag bounds approach. The results of model estimation in the short run showed that there were no significant relationship between independent and dependent variables, but in the long run these relationships were significant. The increase in income inequality in Iran has led to an increase in lending facilities, an increase in bank debt and a resulting banking crisis. Model stability diagrams also show the existence of structural stability in the estimated model.Go (1974) points out that due to the increase in facilities and, in turn, debt uses, household borrowing allows individuals to smooth their consumption when faced with variable incomes. It allows companies to streamline their investment and production in the face of changes in sales, and allows governments to stabilize tax revenues in the face of various expenses. Borrowing also improves the efficiency of capital allocation among the various possible uses in the country. Therefore, it is safe to say that without debt, the economy will not grow and economic fluctuations will be higher than expected.On the other hand, increasing the provision of facilities and accumulating debt is associated with risk. As the level of lending and debt increases, borrowers' ability to repay gradually becomes more sensitive to declining incomes and sales as well as rising interest rates. In the event of any shock, high debt is likely to result in a higher default. Even in the case of a mild shock, high debt borrowers may no longer be considered a valid financial liability and when borrowers default They stop, consumption and investment decrease. So if the recession is high enough, defaults, low demand and high unemployment could have negative consequences for the economy. Accordingly, instead of high and stable growth with low inflation and stability, debt can mean disruptive financial cycles in which economies are one in the middle between a credit boom and default bankruptcies. - When the recessions are deep enough, the financial system fails and can lead to the bankruptcy of the real economy.In this regard, this study sought to answer the question of whether income inequality will lead to a banking crisis? For this purpose, using the autoregression model with finite distribution intervals and in the period 1359-1396, to investigate the short and long term effects of the Gini coefficient as an indicator of income inequality on the ratio of domestic credit to GDP as an indicator of banking crisis. paid.The results of model estimation in the short run indicate that there is no significant relationship between income inequality and the banking crisis, but in the long run this relationship has shown a positive effect, so that with a one percent increase in Gini coefficient, / 39 A 1% increase in the ratio of domestic credit to production has led to a banking crisis.Regarding other variables, it can be said that with the increase of production, investment, production gap, banking crisis has intensified, but with the increase of exchange rate and liquidity, this effect will have a decreasing trend.Clearly, the policy proposal obtained from this study is to develop financial institutions and instruments and increase the quality and efficiency of existing financial institutions to reduce the inequality of income distribution in the Iranian economy. Equitable distribution of credit is one of the things that can reduce inequality and it is suggested that the central bank implement the necessary measures for equitable distribution of credit in the banking system. Also, action to expand the capital market, especially to provide access to the capital market for all people can be among other measures that are recommended to improve the situation of the financial sector and subsequently improve the income distribution.