The impact of monetary and fiscal policy tools on income: Bank interest rates and tax policies in Iran

Document Type : Original

Authors

Department of Economics and Islamic Banking, Faculty of Economics, Kharazmi University, Tehran, Iran.

Abstract

The main objective of this paper is to examine the impact of monetary and fiscal policy tools on income distribution, with a particular focus on Iran. Three key variables are considered for this purpose: tax revenue as a fiscal policy indicator, bank deposit interest rates as a monetary policy indicator, and the Gini coefficient as an income distribution indicator. In this study, the Gini coefficient is analyzed as the dependent variable. To address the research questions and achieve the objectives, the Vector Autoregressive (VAR) model is used, and time-series data from the Central Bank of Iran (2001-2021) is employed. The results of the study show that the relationship between tax revenue and the Gini coefficient is not one-to-one. An increase in tax revenue has a positive and direct impact on the Gini coefficient, playing an important role in income redistribution. On the other hand, the bank deposit interest rate has little effect on income inequality, indicating that changes in interest rates, as a tool of monetary policy, do not significantly reduce or increase income inequality. The findings also suggest that fiscal policies are more influential than monetary policies in Iran. While this issue is linked to challenges such as central bank independence in many countries, in Iran, dependence on fluctuations in oil revenues has led policymakers to prefer expansionary fiscal policies. Ultimately, the weakness of monetary policy tools, particularly interest rate changes, in generating significant shifts in income distribution is evident, which requires serious review and reform in the country’s monetary policy framework.

Keywords

Main Subjects

حوزة موضوعی: ایران

Scope: Iran

References

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Journal of Countries Studies
Volume 3, Issue 2
2025
Pages 405-428

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History

  • Receive Date: 29 December 2024
  • Revise Date: 04 January 2025
  • Accept Date: 05 January 2025

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