The Investigation of Relationship between Shadow Economy and Inequality of Income in Iran: STR Approach

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Qhasemnajad Tohid; MOHAMMADZADEH YOUSEF; REZAZADEH ALI

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Journal: Journal of Economic Research Year:2020 | Volume:55 | Issue:1 Page(s): 187-214

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Title

The Investigation of Relationship between Shadow Economy and Inequality of Income in Iran: STR Approach

Author(s)

Qhasemnajad Tohid | MOHAMMADZADEH YOUSEF | REZAZADEH ALI | Issue Writer Certificate

Keywords

Government SizeQ2

Shadow EconomyQ1

Inequality of IncomeQ2

IranQ1

Smooth Transition Regression (STR)Q1

Abstract

This study investigates the relationship between Shadow Economy and Inequality of Income using smooth transition regression model (STR) as one of the most prominent regime switching models, over the period 1969 to 2015. To this end, we used the Consumption expenditure ratio to GDP as the Government Size variable and transition variable. Gini coefficient was used to measure income inequality and data on the Shadow Economy have been extracted using the MIMIC approach. Linearity test results indicate non-linear relationship between Shadow Economy and income inequality. The results show that the threshold level is 2. 67% and estimated slope parameter is 8. 20. In the first regime, Shadow Economy has a positive impact on income inequality, but the impact of the per capita income is negative and significant. In the second regime, Shadow Economy and per capita income have a different effect than income on inequality. In other words, with increasing Government Size, Shadow Economy has a negative impact on income inequality, but the impact of per capita income is positive.

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