Linkages between Defence Spending and Income Inequality in Iran

This paper contributes in economic literature by investigating the impact of defence spending on income inequality in a case of Iran using time series data over the period of 1969-2011. For this purpose, we have applied the ARDL bounds testing approach to cointegration for long run relationship in the presence of structural breaks arising in the series. The stationarity properties of the variables are tested using structural break unit root tests. The causal relationship between defence spending and income inequality is examined by employing the VECM Granger causality approach. Our findings validate the long run relationship between the series. The results indicated that defence spending improves income distribution in Iran. An inverted-U shaped relationship exists between defence spending and income inequality. Economic growth deteriorates income inequality. The causality analysis reveals that defence spending Granger causes income inequality and feedback effect exists between income inequality and economic growth.