Looking at the effects of financial cycles on the real sector of economy: An examination on the affectability of the unemployment and income inequality in Iran's economy

Document Type : Research Paper

Authors

1 Management and Economics Faculty, Science and Research Branch, Islamic Azad University, Tehran, Iran

2 The Institute for Research and Development in the Humanities, SAMT, Tehran, Iran

Abstract

The present study analyzes the effects of financial cycles and their components on the real sector of Iran’s economy and more precisely on the unemployment rate and income distribution inequality. The theoretical reason behind juxtaposing unemployment and income distribution, is the positive correlation between the two variables under the job-search models, along with their challenging and problematic natures. Employing a multiple-stage methodology, over the 1985-2020 period, this study commences with creating a time-varying index based on the “power cohesion” of dependent and independent variables and then continues by determining their joint-distribution by the Kalman-filter approach. At the second stage, it tries to find the degree of coincidence (or asynchrony) between real sector and financial-credit indices by generating a composite index consisting of cohesive joint-distributed components, yielded in the last phase. In the final phase, it benefits from non-linear models for robustness and validity checking. The results emerging from the second stage illustrate that the values indicating counter-cyclical movement (or improving) among financial cycles, on the one hand, and real sector cycles, unemployment, and Gini-Coefficient, on the other hand, are 0.61, 0.71, and 0.64, respectively. Also, there is an improvement and significant movement between credit cycles and the real sector variables. However, the significance is weak for credit cycles generated from so-called “Directed credits.” The validity of the second stage results is verified by the outcomes of the third phase using some standard and more detailed models which are estimated by non-linear methods. The third stage has considerable policy implications for decision-makers.

Keywords

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Volume 13, Issue 2
July 2022
Pages 3223-3237
  • Receive Date: 05 November 2021
  • Revise Date: 18 January 2022
  • Accept Date: 11 February 2022