Testing Piketty’s Hypothesis in Analyzing Factors Affecting Income Inequality in Iran: Stock-Flow Consistent (SFC) Approach

Abstract

Reducing inequality and establishing social justice by balancing the distribution of income and wealth is one of the main concerns of economic policymakers which has been emphasized in the constitution in Iran. Explaining the relationship between inequality and its causes has been one of the most challenging areas of economic debate in the recent decades; despite extensive research in this area, there are still many ambiguous issues in this regard. In recent years, new hypotheses have been proposed by the French economist, Thomas Piketty on the main causes of the spread of inequality. In his analysis, he considers the gap between the rate of return on capital and the rate of economic growth (r-g) to be the main causes of inequality. However, despite providing logical explanations consistent with changes in inequality patterns, he has not conducted any empirical tests for its scientific-theoretical chain. Therefore, these question arise as to how empirically verifiable the Piketty hypothesis is and is it able to explain the increase in inequality of different countries? For this purpose, a Stock-Flow Consistent (SFC) model was used as a first model in the present study to investigate the relationship between inequality and growth in a macroeconomic framework of Iran. This model tests the conclusions and Piketty assumptions for the Iranian economy when changing key parameters. The results of this model showed that under certain circumstances with decreasing growth rate, income inequality increases. However, the analysis proved that there are no inevitable conditions under which a reduction in the growth rate will lead to a sharp increase in the level of inequality.