The Impact of Central Bank Contractionary Monetary Policy on Banks’ Risk Taking Based on the Agent-Based Approach

Articles in Press

Document Type : Research Paper

Authors

1 Department of Economics,Faculty of Social Sciences .University of Mohaghegh Ardabili

2 Department of Economics,Faculty of Social Sciences, University of Mohaghegh Ardabili, Ardabil, Iran

Abstract

Banking networks are popular topics for empirical and methodological research that use artificial intelligence (AI) methods, including agent-based modeling. This approach (ABM) plays a key role in assessing the performance of the banking network exposed to exogenous shocks. the present study examines the impact of contractionary monetary policy on the risk taking of the banking system in terms of their lending to real sector firms. The present model includes five agents: banks, depositors, the central bank, firms, and the clearing house, the first two of which are intelligent and the rest are non-intelligent. This model includes 10 large banks with uniformly distributed sizes including Mellat, Tejarat, Sepah, Maskan, Keshavarzi, Ayandeh, Parsian, Pasargad, Saderat, and Refah in the period 2019-2024. In this study, the total amount of loans to real sector is used as a proxy for bank risk. The results show that the contractionary monetary policy stimulates banks to reduce the value of loans to real sector firms and thereby assume less risk. However, on the other hand, the share of loans with higher risk increases. Also, the central bank's contractionary monetary policy solves the liquidity problem of the banking system by making the interbank market more dynamic. However, increasing the share of interbank transactions causes more risk contagion in the banking network. Therefore, with such a policy, eliminating the liquidity shortage of the banking network will lead to less stability of the banking system and more risk contagion along with less credit to the real sector of the economy.

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Quarterly Journal of Applied Theories of Economics

Articles in Press, Accepted Manuscript
Available Online from 19 August 2025

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