The Role of Ex-Ante and Ex-Post Indices in Evaluating the Impact of Monetary and Fiscal Shocks on Financial Instability in Iran

Articles in Press

Document Type : Research Paper

Authors

1 Shiraz University, Faculty of Economics, Management and Social Sciences, Department of Economics. Phd Student of Monetary Economics

2 Economics department - Shiraz university

3 Department of Economics, Shiraz University

Abstract

This study investigates whether the impact of monetary and fiscal policy in Iran depends on the choice of the financial instability index and identifies the most suitable indicator for measuring financial instability. Using a New Keynesian dynamic stochastic general equilibrium model, we examine monetary and fiscal policy shocks from 1990 to 2021 through ex-ante and ex-post indices. The ex-ante indices include interest rates, loan rates, entrepreneurial capital return, and bank portfolio rates, while the ex-post index is derived endogenously. The analysis of impulse-response functions shows that increases in the spreads of 'bank portfolio return and interest rate' and 'loan rate and interest rate,' and the negative spreads between 'capital return and loan rate' and 'capital return and interest rate,' result in financial instability. A monetary shock has a greater effect on financial instability than a fiscal shock. The correlation matrix indicates that the spread between the “loan rate and interest rate” is the most appropriate instability index for monetary shocks, while the spread between the return on entrepreneurial capital and the bank portfolio is most suitable for fiscal shocks. The research emphasizes the need to balance the profitability of the banking sector with the real economy to ensure financial stability. It also highlights the importance of coordinating monetary and fiscal policies to achieve this goal. Furthermore, the spread between the “return on entrepreneurial capital and loan rate” shows a more pronounced reaction to shocks.

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Applied Theories of Economics

Articles in Press, Accepted Manuscript
Available Online from 08 July 2026

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