The Role of the Government in The Trade-off Between Income Inequality and Economic Growth:Bayesian Vector Auto Regression Approach

The purpose of this article is to examine the relationship between income inequality and economic growth by financial policies. For this purpose, the Bayesian vector Auto Regression model is estimated for the annual data of the period 1984-2019. Income inequality has been measured with Atkinson's index and current and constructional governments expenses and direct and indirect taxes have been used for financial policy variables. The results obtained from the analysis of the Impulse-response function of the Atkinson index and economic growth to fiscal policy variables indicate that response of economic growth to a shock effect of direct taxes, indirect taxes and construction expenses at a mild rate until the end of the first two periods positive is positive and rising and then fixed. Also, the reaction analysis of Atkinson's index to the positive shock of current and constructional governments Expenses is positive until the end of the first two periods, and after that this effect becomes negative and decreasing. Moreover, On the other hand, the impulse of direct tax on income distribution is unaffected until the end of the first three periods, and after that it shows a negative reaction to it, and finally, the reaction of the Atkinson index to the impulse of indirect tax has been strongly increasing. According to the results of model estimation, the government can achieve the goal of improving income distribution and increasing economic growth by increasing productive construction expenses and reducing unproductive and unnecessary current expenses and improving the provincial tax system