Evaluating the Role of Banking Facilities Distortions in the Impact of Macroeconomic Shocks within the Framework of a Dynamic Stochastic General Equilibrium Model: A Case Study of Iran

Document Type : Research Paper

Authors

1 PhD Candidate in Economics, Shiraz University

2 Assistant Professor of Economics, Shiraz University

Abstract

Banking facilities distortions lead to suboptimal allocation of financial resources and impact various sectors of the economy. In this paper, a dynamic stochastic general equilibrium (DSGE) model, specifically a New Keynesian model, is designed for the Iranian economy, considering two scenarios: the presence and absence of banking facilities distortions. The model is calibrated using Monte Carlo simulation methods with the DYNARE software. The parameter values are calibrated to accurately reflect the main characteristics of the Iranian economy during the period of 1991-2021. The main objective is to examine the effects of major economic shocks on the fluctuations of macroeconomic variables under these two scenarios. The studied shocks include monetary shock, investment shock, wage mark-up shock, and government expenditure shock, which are considered as the sources of economic fluctuations in Iran. The simulation results of the effects of the monetary policy shock indicate that, assuming the absence of banking facilities distortions in the first scenario, the effectiveness of this shock increases, indicating an increased effectiveness of monetary policy in mitigating economic fluctuations. The results also show that, assuming the absence of banking facilities distortions, the economy tends to return to equilibrium faster after experiencing negative investment shocks or wage mark-up shocks, implying a reduction in the impact of these shocks. The simulation results of the effects of government expenditure shocks also demonstrate that, assuming the absence of banking facilities distortions, the effectiveness of this shock increases

Keywords

Main Subjects

References

  1. Abrishami, H., Tohidinia, A., & Heshmati molaie, A. (2016). Ethical Risk on Usury-Free banking operation. Environmental Management Hazards, 3(1), 47-60 (In Persian).
  2. Afrin, S. (2017). The role of financial shocks in business cycles with a liability side financial friction. Economic Modelling, 64, 249-269.
  3. Arnott, R. J., & Stiglitz, J. E. (1979). Aggregate land rents, expenditure on public goods, and optimal city size. The quarterly journal of economics, 93(4), 471-500.
  4. Bebczuk, R. N. (2003). Asymmetric information in financial markets: introduction and applications. Cambridge University Press.
  5. Ben-Gad, M., Pearlman, J., & Sabuga, I. (2022). An analysis of monetary and macroprudential policies in a DSGE model with reserve requirements and mortgage lending. Economic Modelling, 116.
  6. Bernanke, B. S., Gertler, M., & Gilchrist, S. (1999). The financial accelerator in a quantitative business cycle framework. Handbook of macroeconomics, 1, 1341-1393.
  7. Berndt, A., & Gupta, A. (2009). Moral hazard and adverse selection in the originate-to-distribute model of bank credit. Journal of Monetary Economics, 56(5), 725-743.
  8. Carlstrom, C. T., & Fuerst, T. S. (1997). Agency costs, net worth, and business fluctuations: A computable general equilibrium analysis. The American Economic Review, 893-910.
  9. Canova, F. (2007). Methods for applied macroeconomic research(Vol. 13). Princeton university press.
  10. Claus, I. (2011). The effects of asymmetric information between borrowers and lenders in an open economy. Journal of International Money and Finance, 30(5), 796-816.
  11. Crawford, J. (2015). The Moral Hazard Paradox of Financial Safety Nets. Cornell JL & Pub. Pol'y, 25, 95.
  12. Christiano, L. J., Eichenbaum, M., & Evans, C. L. (2005). Nominal rigidities and the dynamic effects of a shock to monetary policy. Journal of political Economy, 113(1), 1-45.
  13. 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 Applied Theories of Economics, 3(1), 1-28 (In Persian).
  14. Duran, M. A., & Lozano-Vivas, A. (2015). Moral hazard and the financial structure of banks. Journal of International Financial Markets, Institutions and Money, 34, 28-40.
  15. Dwyer, Gerald P., Hasman, A., Samartín, M., (2022). Surety bonds and moral hazard in banking. Journal of Financial Stability, 62(1), 1-10.
  16. Eslamloueyan, K., & Hasan, T. (2020). The Effects of Government Expenditure Shocks on Input Efficiency and Consumer Preferences in Iran. Quarterly Journal of Quantitative Economics, 17(3), 1-19 (In Persian).
  17. Gali, J., Smets, F., Wouters, R., (2012). Unemployment in an Estimated New Keynesian Model. Vol. NBER Macroeconomics Annual 2011,26, University of Chicago Press.
  18. Gerali, Andrea, Neri, Stefano, Sessa, Luca, Signoretti, Federico M., (2010). Credit and banking in a DSGE model of the Euro area. Money Credit Bank. 42 (s1), 107–141.
  19. Gertler, M., & Bernanke, B. (1989). Agency costs, net worth and business fluctuations. In Business cycle theory. Edward Elgar Publishing Ltd.
  20. Gertler, M., Karadi, P., (2011). A model of unconventional monetary policy. Monet. Econ. 58 (1), 17–34.
  21. Gertler, M., & Kiyotaki, N. (2010). Financial intermediation and credit policy in business cycle analysis. In Handbook of monetary economics(Vol. 3, pp. 547-599). Elsevier.
  22. Goodfriend, M., & McCallum, B. T. (2007). Banking and interest rates in monetary policy analysis: A quantitative exploration. Journal of Monetary Economics, 54(5), 1480-1507.
  23. Gupta, C. P., & Jain, A. (2022). A Study of Banks’ Systemic Importance and Moral Hazard Behaviour: A Panel Threshold Regression Approach. Journal of Risk and Financial Management, 15(11), 537.
  24. Hellmann, T. F., Murdock, K. C., & Stiglitz, J. E. (2000). Liberalization, moral hazard in banking, and prudential regulation: Are capital requirements enough? American economic review, 91(1), 147-165.
  25. Hristov, N., & Hülsewig, O. (2017). Unexpected loan losses and bank capital in an estimated DSGE model of the euro area. Journal of Macroeconomics, 54, 161-186.
  26. Hirschbühl, D., Krustev, G., & Stoevsky, G. (2020). Financial drivers of the euro area business cycle: a DSGE-based approach.
  27. Hondroyiannis, G., Lolos, S., & Papapetrou, E. (2005). Financial markets and economic growth in Greece, 1986–1999. Journal of International Financial Markets, Institutions and Money, 15(2), 173-188.
  28. Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of financial economics, 3(4), 305-360.
  29. Karlan, D. S., & Zinman, J. (2005). Elasticities of demand for consumer credit. Yale University Economic Growth Center Discussion Paper, (926).
  30. Kemei, J. C., & Kerongo, F. (2014). The effects of information asymmetry in the performance of the banking industry: a case study of banks in Mombasa County. International Journal of Education and Research, 2(2), 1-6.
  31. Khodadadi, F., Samsami, H. (2022). Evaluating the Effectiveness of Indirect Monetary Policy Instruments under Fractional Reserve Banking: the DSGE Approach. Quarterly Journal of Applied Theories of Economics, 9(2), 89-122 (In Persian).
  32. King, Robert G., Rebelo, Sergio T., 1999. Chapter 14 resuscitating real business cycles, Part B. Handbook of Macroeconomics, vol. 1, Elsevier, pp. 927–1007.
  33. Krugman, P. (1999). Balance sheets, the transfer problem, and financial crises(pp. 31-55). Springer Netherlands.
  34. Krugman, P. (1999). What happened to Asia(pp. 315-327). Springer US.
  35. Nückles, M. (2020). Interest rate policy and interbank market Economic Modelling, 91, 779-789.
  36. Mahinizadeh, M., Yavare, K., valibeigi, H., & Shafiei, A. (2019). An Analysis of the Rate of Interest and Inflation in the Banking System Based on Asymmetric Information. Iranian Journal of Trade Studies, 23(92), 231-269.
  37. Meh, C. A., & Moran, K. (2010). The role of bank capital in the propagation of shocks. Journal of Economic Dynamics and Control, 34(3), 555-576.
  38. Messai, A. S., & Jouini, F. (2013). Micro and macro determinants of non-performing loans. International journal of economics and financial issues, 3(4), 852-860.
  39. Morakinyo, A., & Sibanda, M. (2016). Non-performing loans and economic growth in Nigeria: A dynamic analysis. SPOUDAI-Journal of Economics and Business, 66(4), 61-81.
  40. 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).
  41. Pesaran, M. H., & Xu, T. (2016). Business cycle effects of credit shocks in a DSGE model with firm defaults. USC-INET Research Paper, (16-13).
  42. Rannenberg, A. (2012). Asymmetric information in credit markets, bank leverage cycles and macroeconomic dynamics. National Bank of Belgium Working Paper, (224).
  43. Sadeghpour, S., Heidari, H., Mohseni Zonouzi, S. (2021). Study the effect of the monetary and financial shocks in the real sector of Iran's economy with considering of gharz-al -hasanah deposits in the context of a DSGE model. Quarterly Journal of Applied Theories of Economics (In Persian).
  44. Sanjani, M.T. (2014). Financial frictions and sources of business cycle. Working paper International Monetary Fund (WP/14/194).
  45. Samadi, A. H., & Owjimehr, S. (2015). The Investigation of Persistency and Inertia of Inflation in Iran: A Comparison of Hybrid Price Stickiness and Information Stickiness Models. Journal of Economic Modeling Research 5 (19), 41-72 (In Persian).
  46. Seyednoorani, S. M., tari, F., aghajani, K., & hasan zadeh, A. (2017). Affecting Factors on Credit Diversion in Iran. Qjerp, 25 (81), 187-228 (In Persian).
  47. Seyednoorani, S. M., tari, F., aghajani, K., & hasan zadeh, A. (2019). Factors effecting credit diversion. Majlis and Rahbord, 26(98), 41-69 (In Persian).
  48. Smets, Frank, Wouters, Rafael. (2007). Shocks and frictions in US business cycles: a Bayesian DSGE approach. Econ. Rev. 97 (3), 586–606.
  49. Stiglitz, J. E., & Weiss, A. (1981). Credit rationing in markets with imperfect information. The American economic review, 71(3), 393-410.
  50. Schmidt, S., & Wieland, V. (2013). The New Keynesian approach to dynamic general equilibrium modeling: Models, methods and macroeconomic policy evaluation. In Handbook of Computable General Equilibrium Modeling(Vol. 1, pp. 1439-1512). Elsevier.
  51. Shahhosseini, S., & Bahrami, J. (2013). Designing a new Keynesian dynamic general equilibrium model for the Iranian economy. Taking into account the banking sector. Iranian Economic Research, 17(53), 55-84 (In Persian).
  52. Tavakolian, H. (2012). A New Keynesian Phillips Curve in a DSGE Model for Iran. Journal of Economic Research (Tahghighat- E- Eghtesadi), 47(3), 1-22. doi: 10.22059/jte.2012.29251
  53. Tavakolian, H., & Komijani, A. (2012). Monetary Policy under Fiscal Dominance and Implicit Inflation Target in Iran: A DSGE Approach. JEMR, 3 (8), 87-117 (In Persian).
  54. Villa, Stefania, Yang, Jing. (2011). Financial Intermediaries in an Estimated DSGE Model for the United Kingdom, Bank of England working papers 431, Bank of England.
  55. Zhang, D., Cai, J., Dickinson, D. G., & Kutan, A. M. (2016). Non-performing loans, moral hazard and regulation of the Chinese commercial banking system. Journal of Banking & finance, 63, 48-60.
  56. Zhang, Z., & Wu, F. (2020). Moral hazard, external governance and risk-taking: Evidence from commercial banks in China. Finance Research Letters, 37, 101383.
Quarterly Journal of Applied Theories of Economics
Volume 10, Issue 2 - Serial Number 37
September 2023
Pages 145-182

Files

Share

How to cite

Statistics