Evaluating the Effects of Real Interest Rate and Reserve Requirements on the Selected Macro Variables of the Iranian Economy

Document Type : Research Paper


1 M.A. Student in Economics, Shahid Bahonar University

2 Assistant Professor of Economics, Shahid Bahonar University


The association between monetary policy and real economic variables has always been among the economist's major topics of discussion. Depending on the economic situation of Iran, Monetary authorities draw on monetary policy so that they are affected by real economic variables. As a means of monetary policy, interest rate and reserve requirements affect macroeconomic variables significantly. Considering the fact that unemployment, inflation and the lack of sustainable and desirable economic growth have been among the major economic problems of Iran over the past few years, this study uses the simultaneous equation system and adopts generalized method of moments (GMM), in order to analyze the effects of the selected macroeconomic variables of Iran (e.g. inflation, unemployment and economic growth) during the period 1983-2015. The results suggested that the increase in real interest rate is followed by lower GDP, inflation and unemployment, while the increase in reserve requirements results in lower inflation, but higher GDP.


Main Subjects

  1. Abbasi-Nezhad, H., & Tashkini, A. (2007). Applied econometrics (advanced).Tehran: Faculty of Economic and Administrative Sciences, Nour Elm Publication (In Persian).
  2. Anari, A., & Kolari, J. (2016). Dynamics of interest and inflation rates. Journal of Empirical Finance, 39, 129-144.
  3. Ahmadi, M. T., Fallahi, M. A., & Khosravi, S. (2012). Hsiao's causality test between interest rate and inflation rate for mena countries group. Quarterly Journal of Economic Growth and Development Research, 1(3), 203-234 (In Persian).
  4. Ahmadyan, A., & Amiri, H. (2012). Survey of effect of financial repression on inflation at iran economy. Financial knowledge of securities analysis, 5(13), 111-122 (In Persian).
  5. Babalola, O. O., Danladi, J. D., Akomolafe, K. J., & Ajiboye, O. P. (2015). Inflation, interest rates and economic growth in Nigeria. European Journal of Business and Management7(30), 91-102.
  6. Bakhshi, D. R., &  Ansari, S . M. (2015). The effect of commercial banks and population growth on optimal inflation. Quarterly Journal of Quantitative Economics, 12(3), 117-140 (In Persian).
  7. Baltagi. B., (2005), Econometric analysis of panel data, Third ed., John Wiley & Sons Ltd, London.
  8. Bernanke, B. & M. Gertler. (1995). Inside the black box: The credit channel of monetary policy transmission. Journal of Economic Perspectives,19(9), 27–48.
  9. Bhunia, A. (2016). How inflation and interest rates are related to economic growth? a case of India. Journal of Finance and Accounting4(1), 20-26.
  10. Bork, l. (2010). Macro factors, monetary policy analysis and affine term structure models. Journal of International Money and Finance,25(6), 53–73.
  11. Dargahi, H. & Hadian, M. (2016). Evaluation of fiscal and monetary shocks with emphasis on the interactions of banking system balance sheet and the real sector of Iran's economy: A DSGE approach. Quarterly Journal of Quantitative Economics, 3(1), 1-28 (In Persian).
  12. Daliri, H., Mehregan, N. (2014). Effects of removing forced interest rate rules in the banking industry on the effect of monetary policy by DSGE model. Journal of Economic Research (Tahghighat- E- Eghtesadi), 49(3), 523-553 (In Persian).
  13. Diaz Alejandro, C. (1963 ). A note on the impact of devaluation and the redistributive effects. Journal of Political Economy, 71(6), 577 –580 .
  14. Fisher, Irving (1896). Appreciation and Interest; new York.
  15. Fisher Irving, (1930), “The Theory of Interest”, New York: A. M.Kelly .
  16. Ghafari, H., Saadatmehr, M. Fallah, R. M., & Soori, A. (2013). A survey on the effect of interest rate increase of bank loans in iran’s economic growth in the sterotype an newkeynesian dynamic stochastic general equilibrium model. Journal of Management System, 10(1), 1-31.
  17. Granger, C.W.J & Newbold, P. (1974). Spurious regressions in Econometrics. Journal of Econometrics.111-120.
  18. Glocker, C., & Towbin, P. (2015). Reserve requirements as a macroprudential instrument–Empirical evidence from Brazil. Journal of Macroeconomics, 44, 158-176.
  19. Gray, S. (2011). Central bank balances and reserve requirements (No. 11-36). International Monetary Fund.
  20. Gujarati, D. N. (2003). Basic econometrics. Translated by Abrishami, H. Tehran: Universiy of Tehran Press (In Persian).
  21. Hasanzadeh, A. & Akbari, T. (2011). Release of interest rate and its effect on macro variables. Monetary and Banking Research Institute (In Persian).
  22. Hayashi, F. (2000). Econometrics.
  23. Isazadeh, S., & Saeednia, P. (2004). World economics and business: Minimum wages and methods for determining it. Journal of Business Studies, (191), 21-29 (In Persian).
  24. Jafari- Samimi, A., & Gholizadeh, K. S. (2007). Investigating the relationship between Inflation and economic growth in developing countries: New evidence. Journal of Nameh Mofid ,13(63), 45-58 (In Persian).
  25. Jorgensen, J. J., & Terra, P. R. (2003, June). The Fisher hypothesis in a VAR framework: Evidence from advanced and emerging markets. In Conference Paper. Helsinki: European Financial Management Association. Annual Meetings (pp. 25-28).
  26. Kafaee, M. A., & Kheirandish, E. (2010).The effect of changing the interest rate of bank deposits on macroeconomic variables in a systematic way. Journal of Economics and Modeling, 1(4) (In Persian).
  27. Keynes, J. M. (1930). A treatise on money (London). The Collected Writings of John Maynard Keynes6.
  28. Komijani, A., & Alinejad-Mehrabani, F. (2012). Evaluating the effectiveness of monetary transmission channels on production and inflation besides analyzing their relative importance in Iran’s economy. The Journal of Planning and Budgeting, 17(2), 39-63 (In Persian).
  29. Krugman, P., & Taylor, L. (1978 ). Contractionary effects of devaluation. Journal of International Economics, 8, 445 –456 .
  30. Lardic, S. and Mignon V. (2003), Fractional co integration between nominal interest rate and inflation: A re_ examination of the Fisher relationship in G7 countries”, Economic Bulletin, 3(14),1-10.
  31. Liu, M. H., & Margaritis, D. (2014). Inflation, monetary policy and reserve requirement ratio adjustments in China. Frontiers of Business Research in China8(2), 137-153.
  32. Ma, G., Xiandong, Y., & Xi, L. (2013). China’s evolving reserve requirements. Journal of Chinese Economic and Business Studies, 11(2), 117-137.
  33. Mehregan, N., Ezati, M., & Asgharpour, H. (2006). Causal relationship between the interest rate and inflation using panel data. Quarterly Journal of the Economic Research, 6(3), 91- 105 (In Persian).
  34. Mimir, Y., Sunel, E., & Taşkın, T. (2013). Required reserves as a credit policy tool. The BE Journal of Macroeconomics, 13(1), 823-880.
  35. Mishkin, F. S. (1995). Symposium on the monetary transmission mechanism. The Journal of Economic Perspectives9(4), 3-10.
  36. Mohammadzadeh, A., Shahikitash, M., & Roshan, R. (2015). Comparison of consumption based capital asset pricing (CCAPM) and Housing CCAPM (HCCAPM) model in explaining stock returns in Iran. Quarterly Journal of Applied Theories of Economics, 2(3), 49-72 (In Persian).
  37. Nusair, S. A. (2009). Non-linear co-integration between nominal interest rates and inflation: An examination of the fisher hypothesis for asian countries. Global Economic Review38(2), 143-159.
  38. Onyeiwu, C. (2012). Monetary policy and economic growth of Nigeria. Journal of Economics and Sustainable Development, 2(7).
  39. Parvin, S., Shakeri, A., & Ahmadian, A. (2014). Balance sheet effects of monetary policy on banking system and macroeconomic variables of the iranian economy: A DSGE approach. Iranian Journal of Economic research, 19(58), 77-115 (In Persian).
  40. Pérez-Forero, F., & Vega, M. (2014). The dynamic effects of interest rates and reserve requirements (No. 2014-018).
  41. Peterson, p. G. (2001). The transmission mechanism of monetary policy: Analysing the financial market pass-through.
  42. Razmi, M. J., Arabshahi, M., & Bastam, M. (2012). Investigating the relationship between interest rate and inflation in Iran. National Conference on Economic Jihad (In Persian).
  43. Rahmani, T., Behpour, S, & Ostadzad, A. H. (2013). An empirical examination of the relationship between productivity and unemployment: simultaneous equations approach. Journal of Economic Research and Policies, 21 (67) ,153-170 (In Persian).
  44. Renani, H. (2010). The effects of monetary policy on production and prices in Iran: a structural vector error correction (SVEC) approach. The Journal of Economic Policy, 2(3), 45-69. (In Persian).
  45. Sahebhonar, H., Cheshomi, A,. & Falahi, M. A. (2013). The effects of monetary shocks on Iran economic sectors. Quarterly Journal of Economic Growth and Development Research, 3(11), 41-56 (In Persian).
  46. Sameti, M., dallaly, R., Khoshakhlagh, R., & shirani fakhr, Z. (2010). Investigating the causal relationship between macroeconomics variables for reducing the rate of interest in iran with bayesian causal map (BCM) approach. Journal of Economic Research (Tahghighat- E- Eghtesadi), 44(1), (In Persian).
  47. Shirinbakhsh, S., & Jabari, E. (2010). The study of legal reserve and bank’s assets on banking facilities (by using GMM method). Financial Knowledge of Securities Analysis, 3(5), 19-32 (In Persian).
  48. Subramaniam, T., & Baharumshah, A. Z.(2011). Determinants of unemployment in the Philippines. The Empirical Economic Letters, 10, 1247-1257.
  49. Taherifard, E., & Mousavi, A. K. A. (2008). The effectiveness of monetary policy on macroeconomic variables. Journal of Economic Research (Tahghighat- E- Eghtesadi), 43(83), 137-162 (In Persian).
  50. Taghavi, M., & Lotfi, A. (2006). The study of monetary policy effects on deposits, banking facilities and liquidity of the country's banking system (1374-1382). Journal of Economic Reaserch , 6(20), 131-165 (In Persian).
  51. Tavakolian, H. (2011). Monetary policy performance in Iran during the years 1972 to 2009. Quarterly Journal of Tazehaye Eghtesad, 9(132), 42-53 (In Persian).
  52. Wicksell, K. (1898), Interest and prices: A study of the causes of regulating the value of money,Translated by R. F. Kahn, 1936, London, UK: MacMillan.
  53. Zivot, E., & Andrews, D. W. K. (2002). Further evidence on the great crash, the oil-price shock, and the unit-root hypothesis. Journal of Business & Economic Statistics, 20 (1), 25-44.