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Dr Farideh Khodadadi, Dr Hossein Samsami,
Volume 0, Issue 0 (12-2024)
Volume 0, Issue 0 (12-2024)
Abstract
Aim and Introduction
The financial sector has seen considerable growth in many post World War II western economies. The consequences of the Great Financial Crisis of 2007-2009 displayed how large the reach of the industry is, and how actions taken by a few important role players, can harm the general public. It is due to the consequences of the Great Financial Crisis that the notion of reforming the banking sector came about. The call for reform occurred in the 1940s as well, after the Great Crash. It was here that Full Reserve Banking (FRB), the broad term for the proposed banking reform and the subject of this dissertation, originated.
The Great Crash ended a period of expansion and growth in the USA in the 1920s where credit was easily available, and the money supply grew. The subsequent Great Depression was an economic event of unprecedented dimensions (Temin, 2000). The years 1929-1933 held a stock market crash, a banking crisis, and a collapse of commodity prices. Friedman and Schwartz (1963) contended that the primary propagation mechanism of the Depression was the contraction in the US money supply, together with banking panics. There were three banking crises in that short period, and it was the failure of two large banks, the Bank of United States and Caldwell and Company, that caused most of the problem. These banks had undergone rapid credit expansion in the 1920s and collapsed under the pressure of the recession (Temin, 2000: 307). A response to the recession was to say that the root cause was bad banking practice and that stricter regulations should be imposed to prevent future crises. Regulation was introduced in The Glass-Steagall Act (1933) however, a more severe suggestion was that bank deposits should be fully backed by bank reserves, Full Reserve Banking, an approach proposed in the Chicago Plan.
The Chicago Plan was proposed by Henry Simons, Irving Fisher and others, to prevent another crisis. It proposed requiring banks to hold 100 per cent reserves. This would simultaneously curb the possibility of reckless lending, and eliminate the risk of bank runs, thereby eliminating the possibility of another banking crisis.
Over the past years, the nominal capacity of the supply of bank facilities has increased significantly, and the main increase in bank assets has come from the increase in granting facilities. On the liabilities side of the banks' balance sheets, non-governmental sector deposits (due to paying high interest rates to depositors) during the year 2013 to 2022 has increased by 33.6% on average.
Statistical evidence shows that the real sector of the economy has not benefited much from the expansion of the banking network's balance sheet and the allocation of bank resources has not led to economic growth. On the other hand, it can be seen that the liquidity created by the banking system has not been absorbed by the real sector of the economy and its effects have been manifested in nominal variables in the form of price increases or turbulences in the currency market and other assets. The average growth of real GDP (without oil) during the years 2013 to 2022 was about 1.6 percent.
In general, it can be seen that due to the endogenous nature of money, the central bank has not had a significant success in controlling the growth of monetary aggregates through controlling the growth of the monetary base and its components (statistical evidence in recent decades confirms this); So that the credibility of the central bank's monetary policies has been challenged and the economy has been exposed to continuous threats of inflation and monetary and financial instabilities.
Methodology
This study will employ several techniques for gathering data, including a library type, a documentary branch, and the use of databases, such as those of the Central Bank of the Islamic Republic of Iran and the World Bank. Based on the characteristics of the Iranian economy under fractional & full reserve banking, a random dynamic general equilibrium model was developed for the period 1991-2021. Typical econometric methods are also used to evaluate the hypotheses. This has enabled assessing the effects of the exchange rate shock under two scenarios. It should be noted that the models were estimated in the dynare program space under MATLAB software.
Findings
The exchange rate shock has a negative effect on the consumption of the private sector at real prices, probably due to an increase in import prices. This has led to a decrease in the import of goods. Since imports form a part of the consumption for the private sector, therefore, the consumption by this sector decreases by about 0.5 percent. The Exchange rate shock has had a positive effect on the net foreign exchange reserves of the central bank. The growth rate of the monetary base is also affected by the currency shocks. With the increase in the exchange rate, although the central bank first reacts to the inflationary conditions resulting from the currency shocks through the currency reaction function and reduces the base monetary growth rate, but this situation is not very durable and finally the monetary base growth rate will increase by about 0.4 percent.
If these resources enter the banking system, due to the 100 percent reserve, it has led to the crediting of the banks, and as a result, inflation and final costs have decreased. But in fractional reserve banking, banks create money by attracting deposits, which in turn creates money by them. As a result of this jump, inflation and the final cost will increase.
The exchange rate shock also increases inflation because with the increase in the nominal growth rate of the exchange rate, the marginal cost of each import unit increases and finally the country's inflation increases by 0.7 percent.
Discussion and Conclusion
The purpose of this research is to investigate the effects of exchange rate impulse on the macroeconomic variables of Iran's economy in the conditions of partial and full reserve banking. To achieve this goal, a new Keynesian stochastic dynamic general equilibrium model was designed considering fractional and full reserve banking system (FRB). The realities of the Iranian economy are considered, and then the effects of exchange rate shocks under two types of banking are investigated. After determining the input values of the model and estimating the parameters using the seasonal data of Iran's economy during the period of 1991-2022 using the Bayesian estimation method, the results obtained from the simulation of the model variables indicate the validity of the model in describing the fluctuations of the Iranian economy. The results of the model indicate that, as a result of the exchange rate shock, the growth rate of the monetary base and consequently the amount of money is affected. Under full reserve banking, due to the full reserve of deposits, this has led to a lower increase in inflation and final cost. However, in partial reserve banking, due to the less control of the banking system, despite having two tools to control the growth of the monetary base and the nominal exchange rate, it will create higher fluctuations in the inflation rate and other macroeconomic variables. In other words, the study model has been slightly different from the basic model in the face of the currency impulse, both in terms of the amplitude and the length of the fluctuation
The financial sector has seen considerable growth in many post World War II western economies. The consequences of the Great Financial Crisis of 2007-2009 displayed how large the reach of the industry is, and how actions taken by a few important role players, can harm the general public. It is due to the consequences of the Great Financial Crisis that the notion of reforming the banking sector came about. The call for reform occurred in the 1940s as well, after the Great Crash. It was here that Full Reserve Banking (FRB), the broad term for the proposed banking reform and the subject of this dissertation, originated.
The Great Crash ended a period of expansion and growth in the USA in the 1920s where credit was easily available, and the money supply grew. The subsequent Great Depression was an economic event of unprecedented dimensions (Temin, 2000). The years 1929-1933 held a stock market crash, a banking crisis, and a collapse of commodity prices. Friedman and Schwartz (1963) contended that the primary propagation mechanism of the Depression was the contraction in the US money supply, together with banking panics. There were three banking crises in that short period, and it was the failure of two large banks, the Bank of United States and Caldwell and Company, that caused most of the problem. These banks had undergone rapid credit expansion in the 1920s and collapsed under the pressure of the recession (Temin, 2000: 307). A response to the recession was to say that the root cause was bad banking practice and that stricter regulations should be imposed to prevent future crises. Regulation was introduced in The Glass-Steagall Act (1933) however, a more severe suggestion was that bank deposits should be fully backed by bank reserves, Full Reserve Banking, an approach proposed in the Chicago Plan.
The Chicago Plan was proposed by Henry Simons, Irving Fisher and others, to prevent another crisis. It proposed requiring banks to hold 100 per cent reserves. This would simultaneously curb the possibility of reckless lending, and eliminate the risk of bank runs, thereby eliminating the possibility of another banking crisis.
Over the past years, the nominal capacity of the supply of bank facilities has increased significantly, and the main increase in bank assets has come from the increase in granting facilities. On the liabilities side of the banks' balance sheets, non-governmental sector deposits (due to paying high interest rates to depositors) during the year 2013 to 2022 has increased by 33.6% on average.
Statistical evidence shows that the real sector of the economy has not benefited much from the expansion of the banking network's balance sheet and the allocation of bank resources has not led to economic growth. On the other hand, it can be seen that the liquidity created by the banking system has not been absorbed by the real sector of the economy and its effects have been manifested in nominal variables in the form of price increases or turbulences in the currency market and other assets. The average growth of real GDP (without oil) during the years 2013 to 2022 was about 1.6 percent.
In general, it can be seen that due to the endogenous nature of money, the central bank has not had a significant success in controlling the growth of monetary aggregates through controlling the growth of the monetary base and its components (statistical evidence in recent decades confirms this); So that the credibility of the central bank's monetary policies has been challenged and the economy has been exposed to continuous threats of inflation and monetary and financial instabilities.
Methodology
This study will employ several techniques for gathering data, including a library type, a documentary branch, and the use of databases, such as those of the Central Bank of the Islamic Republic of Iran and the World Bank. Based on the characteristics of the Iranian economy under fractional & full reserve banking, a random dynamic general equilibrium model was developed for the period 1991-2021. Typical econometric methods are also used to evaluate the hypotheses. This has enabled assessing the effects of the exchange rate shock under two scenarios. It should be noted that the models were estimated in the dynare program space under MATLAB software.
Findings
The exchange rate shock has a negative effect on the consumption of the private sector at real prices, probably due to an increase in import prices. This has led to a decrease in the import of goods. Since imports form a part of the consumption for the private sector, therefore, the consumption by this sector decreases by about 0.5 percent. The Exchange rate shock has had a positive effect on the net foreign exchange reserves of the central bank. The growth rate of the monetary base is also affected by the currency shocks. With the increase in the exchange rate, although the central bank first reacts to the inflationary conditions resulting from the currency shocks through the currency reaction function and reduces the base monetary growth rate, but this situation is not very durable and finally the monetary base growth rate will increase by about 0.4 percent.
If these resources enter the banking system, due to the 100 percent reserve, it has led to the crediting of the banks, and as a result, inflation and final costs have decreased. But in fractional reserve banking, banks create money by attracting deposits, which in turn creates money by them. As a result of this jump, inflation and the final cost will increase.
The exchange rate shock also increases inflation because with the increase in the nominal growth rate of the exchange rate, the marginal cost of each import unit increases and finally the country's inflation increases by 0.7 percent.
Discussion and Conclusion
The purpose of this research is to investigate the effects of exchange rate impulse on the macroeconomic variables of Iran's economy in the conditions of partial and full reserve banking. To achieve this goal, a new Keynesian stochastic dynamic general equilibrium model was designed considering fractional and full reserve banking system (FRB). The realities of the Iranian economy are considered, and then the effects of exchange rate shocks under two types of banking are investigated. After determining the input values of the model and estimating the parameters using the seasonal data of Iran's economy during the period of 1991-2022 using the Bayesian estimation method, the results obtained from the simulation of the model variables indicate the validity of the model in describing the fluctuations of the Iranian economy. The results of the model indicate that, as a result of the exchange rate shock, the growth rate of the monetary base and consequently the amount of money is affected. Under full reserve banking, due to the full reserve of deposits, this has led to a lower increase in inflation and final cost. However, in partial reserve banking, due to the less control of the banking system, despite having two tools to control the growth of the monetary base and the nominal exchange rate, it will create higher fluctuations in the inflation rate and other macroeconomic variables. In other words, the study model has been slightly different from the basic model in the face of the currency impulse, both in terms of the amplitude and the length of the fluctuation
Mr Abolfazl Dehghani, Dr Kazem Yavari, Dr Mehdi Haj Amini, Dr Mohammad Hassan Zare,
Volume 0, Issue 0 (12-2024)
Volume 0, Issue 0 (12-2024)
Abstract
Aim and Introduction
Measurement and examination of unobservable variables directly such as inflation expectations or potential output, is really challenging. Inflation expectations have been considered a key variable in many macroeconomic models, particularly in the realm of monetary economics. Macroeconomic models assume that economic agents make consumption, savings, and labor market decisions based on their perception of future inflation levels, and these decisions play a great role in realizing economic variables, including inflation. The role of inflation expectations differs from other inflation-generating factors. While factors such as money supply, budget deficit, exchange rate, and to some extent, economic sanctions can be considered as policy tools. Inflation expectations normally result from the interaction of other factors and may potentially predict future inflation. For example, an increase in the budget deficit, if not addressed independently by the Central Bank, can lead to an increase in money supply, inflation, and intensification of inflation expectations. Thus, inflation expectations can be considered as a variable that evolves within society and changes due to other inflation-generating factors. However, once formed, these expectations themselves become significant factors in inflation and other economic variables. Unlike many countries, in Iran, despite the importance of inflation due to decades of double-digit inflation, no action has been taken to produce and provide survey data related to this variable. However, according to existing literature, comparing the results of alternative methods incorporating inflation expectations with survey data can provide valuable insights. In practice, incorporating inflation expectations can improve the performance of inflation prediction models.
Methodology
Empirical research indicates that methods that consider inflation expectations along with its fluctuations and dynamics outperform models that do not consider these dynamics. Therefore, paying proper attention to how inflation expectations form and fluctuate, as well as avoiding simple methods, is necessary in calculating inflation expectations. In this research, an attempt was made to calculate and present data related to this variable in the framework of rational expectations for the period of 1996 to 2021 using the random forest regression method, considering the strengths and weaknesses of each method of mapping inflation expectations. Subsequently, after learning the random forest-based model, by conducting an in-sample prediction, the data were extracted and the features related to rational expectations regarding these data were examined.
Findings
The coefficient of determination value for the test data was found to be 80%, indicating that, on average, 80% of inflation variations are correctly predicted by economic factors using the model inputs or features. Based on this and by examining the features related to estimation residuals, it was determined that economic factors in predicting inflation do not exhibit systematic errors and, with a sufficiently large time interval and having an adequate information set, can have a proper understanding of inflation behavior. Moreover, the results of comparing inflation expectations based on random forest regression-based predictions show superiority of this approach compared to competing methods such as the Hodrick-Prescott filter. After that, the importance of each of the factors in the basket of information related to inflation expectations was ranked. It should be noted that the selection of features for predicting inflation expectations was not based on the direct attention of households and economic factors to these features. Rather, economic factors and households may find the effect of these features in other evidence. For example, the effect of an increase in the exchange rate on the prices of goods that are somehow related to this variable may be apparent to households, and fundamentally, the prevalent interpretation of rational expectations in the literature of this field is based on this approach. The results of this ranking indicate that among the entire information set, factors such as inflation breaks, exchange rates, and economic sanctions had the highest importance in shaping inflation expectations.
Discussion and Conclusion
It is worth mentioning that inflation breaks have been identified as the most important factor among the entire information set as a manifestation of the adaptive section of inflation expectations. However, this does not mean that expectations are entirely adaptive. Based on the research findings, it is clear that if economic factors rely solely on the adaptive section to predict inflation, zero estimation error, unpredictability of errors, and consequently the formation of rational expectations will not be achieved. Using a combination of three approaches: gradient boosting algorithm, random forest algorithm, and linear regression, a voting regression was also performed, showing a 3% improvement in determination coefficient compared to random forest (83%). Moreover, other results, such as the order and intensity of feature importance, and predicted inflation values, are similar to the random forest method with slight variations which means, estimating rational expectations is reliable
Measurement and examination of unobservable variables directly such as inflation expectations or potential output, is really challenging. Inflation expectations have been considered a key variable in many macroeconomic models, particularly in the realm of monetary economics. Macroeconomic models assume that economic agents make consumption, savings, and labor market decisions based on their perception of future inflation levels, and these decisions play a great role in realizing economic variables, including inflation. The role of inflation expectations differs from other inflation-generating factors. While factors such as money supply, budget deficit, exchange rate, and to some extent, economic sanctions can be considered as policy tools. Inflation expectations normally result from the interaction of other factors and may potentially predict future inflation. For example, an increase in the budget deficit, if not addressed independently by the Central Bank, can lead to an increase in money supply, inflation, and intensification of inflation expectations. Thus, inflation expectations can be considered as a variable that evolves within society and changes due to other inflation-generating factors. However, once formed, these expectations themselves become significant factors in inflation and other economic variables. Unlike many countries, in Iran, despite the importance of inflation due to decades of double-digit inflation, no action has been taken to produce and provide survey data related to this variable. However, according to existing literature, comparing the results of alternative methods incorporating inflation expectations with survey data can provide valuable insights. In practice, incorporating inflation expectations can improve the performance of inflation prediction models.
Methodology
Empirical research indicates that methods that consider inflation expectations along with its fluctuations and dynamics outperform models that do not consider these dynamics. Therefore, paying proper attention to how inflation expectations form and fluctuate, as well as avoiding simple methods, is necessary in calculating inflation expectations. In this research, an attempt was made to calculate and present data related to this variable in the framework of rational expectations for the period of 1996 to 2021 using the random forest regression method, considering the strengths and weaknesses of each method of mapping inflation expectations. Subsequently, after learning the random forest-based model, by conducting an in-sample prediction, the data were extracted and the features related to rational expectations regarding these data were examined.
Findings
The coefficient of determination value for the test data was found to be 80%, indicating that, on average, 80% of inflation variations are correctly predicted by economic factors using the model inputs or features. Based on this and by examining the features related to estimation residuals, it was determined that economic factors in predicting inflation do not exhibit systematic errors and, with a sufficiently large time interval and having an adequate information set, can have a proper understanding of inflation behavior. Moreover, the results of comparing inflation expectations based on random forest regression-based predictions show superiority of this approach compared to competing methods such as the Hodrick-Prescott filter. After that, the importance of each of the factors in the basket of information related to inflation expectations was ranked. It should be noted that the selection of features for predicting inflation expectations was not based on the direct attention of households and economic factors to these features. Rather, economic factors and households may find the effect of these features in other evidence. For example, the effect of an increase in the exchange rate on the prices of goods that are somehow related to this variable may be apparent to households, and fundamentally, the prevalent interpretation of rational expectations in the literature of this field is based on this approach. The results of this ranking indicate that among the entire information set, factors such as inflation breaks, exchange rates, and economic sanctions had the highest importance in shaping inflation expectations.
Discussion and Conclusion
It is worth mentioning that inflation breaks have been identified as the most important factor among the entire information set as a manifestation of the adaptive section of inflation expectations. However, this does not mean that expectations are entirely adaptive. Based on the research findings, it is clear that if economic factors rely solely on the adaptive section to predict inflation, zero estimation error, unpredictability of errors, and consequently the formation of rational expectations will not be achieved. Using a combination of three approaches: gradient boosting algorithm, random forest algorithm, and linear regression, a voting regression was also performed, showing a 3% improvement in determination coefficient compared to random forest (83%). Moreover, other results, such as the order and intensity of feature importance, and predicted inflation values, are similar to the random forest method with slight variations which means, estimating rational expectations is reliable
Dr. Soheil Roudari, Masoud Homayounifar, Professor Mostafa Salimifar,
Volume 21, Issue 1 (3-2021)
Volume 21, Issue 1 (3-2021)
Abstract
In this research, the impact of social capital through influencing the efficiency of government expenditure is investigated using three-stage least-squares model in Iran during 2005: Q1 to 2018: Q2. The effects of exchange rate, stock market index and oil revenues on non-performing loans of public and private sectors are also examined. Results suggest that given the increased efficiency of government expenditure, social capital has a significant negative impact on non-performing loans of public and private sectors. In addition, exchange rate has a significant negative impact on banking system’s receivables from public sector and a significant negative impact on banks’ receivables from private sector. Stock market index has no significant impact on non-performing loans of both public and private sector, since stock market is not liquid enough and has low share in financing businesses. Economic growth has also no significant impact on non-performing loans of both sectors, which can be explained by the impact of improvement in business environment and individuals’ purchasing power on their ability to repay their loans. Thus, by stabilizing economy (controlling the fluctuations of exchange-rate, stock market and so forth) and by improving social capital, it is expected that efficiency of government expenditure is increased and non-performing loans of both sectors is decreased.
Dr. Ameneh Nadalizadeh, Professor Kambiz Kiani, Dr. Shamseddin Hoseini, Dr. Kambiz Peykarjou,
Volume 21, Issue 1 (3-2021)
Volume 21, Issue 1 (3-2021)
Abstract
Oil price shocks have an undesirable effect on financial stability and banking systems, in addition to creating uncertainty and negative effects on the macroeconomic performance of oil-exporting countries. In fact, the dependency of government spending policies on oil price movements in oil exporting countries creates feedback loops between asset prices and bank credits that could lead to an increase in vulnerability of the financial sector. Therefore, considering the importance of the issue, this study aims to investigate the asymmetric effects of oil prices on non-performing loans (NPLs), as credit risk criteria, by applying data from 18 selected banks in Iran during 2006-2017. In this regard, the relationship between variables has been estimated using Panel Nonlinear Autoregressive Distributed Lag (PANEL NARDL). The predictability of symmetric and asymmetric PANEL ARDL models is assessed by applying RMSE and Campbell and Thompson (2008) tests. The results show that the asymmetric model has better performance and efficiency than the symmetric model. These asymmetric effects are significant in both short-term and long-term. Based on the results, the impact of oil price on the NPLs of some banks is positive and in the others is negative and significant.
Mrs. Elham Hagehashemi, Dr Nasrin Mansouri, Dr Behrouz Sadeghi Amroabadi, Dr Mehdi Fadae,
Volume 21, Issue 2 (6-2021)
Volume 21, Issue 2 (6-2021)
Abstract
Exchange rate is one of the most influential factors affecting Iran's macroeconomic variables. Exchange rate fluctuations in Iran have always been one of the major challenges for policymakers. On the other hand, many central banks today consider transparency as one of the main and vital priorities in achieving the effectiveness of monetary policy and communicating effectively with the people and being accountable. This transparency can affect macroeconomic expectations and the exchange rate. In this study, the effect of central bank transparency on exchange rate fluctuations is investigated using the ARDL method over the period 1981-2018. This study is based on analytical, applied and correlational research methods, which uses time-series econometric regression model. The transparency of the central bank, as independent variable, is measured by Dincer & Eichengreen index, and exchange rate fluctuations, as dependent variable, are constructed by GARCH method. The results show that the transparency of the central bank reduces exchange rate fluctuations in both short run and long run, and there is a long-term synergistic relationship between research variables.
Dr Mohammad Noferesti, Dr Mehdi Yazdani, Mrs. Nasim Babaee,
Volume 21, Issue 3 (9-2021)
Volume 21, Issue 3 (9-2021)
Abstract
Assessing the impact of a monetary policy through the banking system on the economy is important because the highest share of Iran’s finance market belongs to the banking sector. For this purpose, this research aims to investigate the impact of changing the bank deposit profit rate through the banking system. This paper focuses on the role of deposits as one of the main financing sources of banks in a macro-structural econometric model over the period of 1973-2017.
In this respect, focusing on Iran’s banking system; a model was first formulated according to the structure of the Iranian economy. Then, three scenarios, including increasing the profit rate, decreasing the profit rate, and pegging policy, were incorporated into the model to observe the impact of profit rate changes.
The results of the simulation reveals a negative relationship between the deposit profit rate and gross domestic product. An increase in the bank deposit profit rate along with increasing the deposits through free credit resources raises credit provision by the banking system, causing a direct impact on investment. On the other hand, implementing this scenario increases the cost of capital and creates an inverse effect on investment. However, the impact of the cost of capital is stronger and leads to a reduction in investment and, consequently, reduces the output by 0.66%.
In the scenario of decreasing the profit rate, opposite results are observed, and the output increases by 0.71%. In the third scenario (Pegging deposit profit rate to 17%), however, the output increases by 0.46%. Therefore, the results implies that an increase in the bank profit rate is not confirmed by the theory of McKinnon and Shaw and decreases the GDP.
Mrs. Hadiseh Taghizadeh Elyas Abad, Ali Rezazadeh, Dr Khalil Jahangiri,
Volume 21, Issue 3 (9-2021)
Volume 21, Issue 3 (9-2021)
Abstract
The purpose of this research is to study the effects of democracy and corruption on attracting foreign direct investment in West and East Asia. To do this, a dynamic panel model and generalized method of moments are employed over the period 2009-2018. The results of the estimates for the 13 countries of the West Asia Group indicate a positive and significant relationship between the democracy and foreign direct investment and the existence of a significant negative correlation between corruption and the consumer price index with the foreign direct investment. Also, in this group of countries, the effects of the degree of trade openness, democracy and real exchange rate on foreign direct investment were positive and significant and the effects of corruption and consumer price index were negative and significant. Besides, according to the results of this method for 15 East Asian countries, the corruption and consumer price index had negative and significant effects, and the democracy, corruption, trade openness, economic growth and real exchange rate had positive and significant impacts on foreign direct investment. Therefore, regarding the effect of democracy on attracting foreign direct investment, Jensen's theory was approved in both groups of countries, but regarding the effect of corruption on FDI, in East Asia the theory of helping hand of corruption and in West Asia the theory of destructive hand or the corruption was confirmed. According to the results, the impact of these variables on foreign direct investment in the East Asian group was greater than the West Asian group.
Dr Shahryar Zaroki, Dr Mohammad Abdi Seyyedkolaee, Mr. Arman Yousefi Barfurushi,
Volume 21, Issue 4 (11-2021)
Volume 21, Issue 4 (11-2021)
Abstract
Since income inequality can affect individuals’ lives economically, socially, and environmentally, analyzing variables influencing income inequality is of great importance. Considering the fact that studies in Iran underestimate the role of the asymmetric macroeconomic instability on income inequality, this study attempts to analyze the asymmetric effect of macroeconomic instability on income inequality in Iran. To this aim, a non-linear autoregressive distributed lags model has been used over the period 1971-2018. The results indicate that in both symmetric and asymmetric models, macroeconomic instability has a direct effect on income distribution. It means that based on the asymmetric model, increases in macroeconomic instability raise the income inequality (unfavorable effect), and decreases in it reduce the income inequality (favorable effect). In terms of effect size, decreases in macroeconomic instability affect income inequality more than increases in it. In addition, in both asymmetric and symmetric models, an increase in direct tax or energy price reduces the income inequality, while an increase in indirect tax raises income inequality. Furthermore, the Kuznets hypothesis is not rejected in this study.
Mrs. Faezeh Zorriyeh Mohammadali, Dr Mohammadreza Nahidi Amirkhiz, Dr Ali Paytakhti Oskooe, Reza Ranjpour,
Volume 21, Issue 4 (11-2021)
Volume 21, Issue 4 (11-2021)
Abstract
One of the most important issues in monetary and fiscal policy analysis is their efficiency or effectiveness, which tells policymakers about effectiveness of policies. In general, the effectiveness or effectiveness of monetary and fiscal policies refers to the extent to which they affect equilibrium national output or income. Therefore, in order to achieve its goals, the policymaker should be able to respond appropriately to the production gap and inflation accordingly, a policy rule covering the goals of the central bank should be used. In this study, in the framework of Taylor rule, the response of monetary and fiscal policies to the output gap has been investigated in the Iranian economy using the Quantile regression method over the period 1976-2018. The results show that by increasing the output gap in different quantities, monetary authorities do not show any reaction to the output gap. But government policymakers pursue an expansionary policy toward the output gap, which is contrary to Taylor's rule, and the results confirm that government policymakers make policy at their will.
Mr. Mohammad Sabbaghchi Firouzabad, Zohre Tabatabaienasab, Dr Abbas Alavi Rad,
Volume 22, Issue 1 (3-2022)
Volume 22, Issue 1 (3-2022)
Abstract
The role of money in the design and implementation of monetary policies for price stability, especially since 2007-2009 global financial crisis, has been reintroduced as a major policy issue in both developed and developing countries. In this regard, the money demand function is one of the most important components of any monetary system, which plays a decisive role in the mechanism of transfer of monetary policy to the real sector of the economy. Therefore, in order to analyze monetary issues and to provide appropriate solutions for overcoming economic problems, it is necessary for the policymaker to have a correct understanding of the money demand function. This paper answers the question of whether sudden changes in money supply cause instability in money demand function. Hence, the present study, with Markov switching approach and using simple sum and Divisia, estimates the demand for money function in the Iranian economy during 1988q2 -2020q2 and evaluates its stability. The results indicate that demand for money function is stable in regime one but being in regime two and three, namely the average growth of money and the sharp growth of money, has led to instability in the demand for money function, and the diversion of the monetary policy objectives.
Mr. Mohammadjavad Khosrosereshki, Dr Reza Najarzadeh, Dr Hassan Heydari,
Volume 22, Issue 2 (6-2022)
Volume 22, Issue 2 (6-2022)
Abstract
The purpose of this study is to investigate the impact of adding a non-Ricardian household to a DSGE model in choosing the Ramsey optimal monetary policy and consequently the effects on macroeconomic variables (such as output gap, consumption gap, inflation, and rising nominal exchange rate). Therefore, after estimating a model for the Iranian economy, the Ramsey optimal monetary policy was selected from 6 monetary policy alternatives. Then, in two scenarios, a non-Ricardian household is added to the model. In the first scenario, the non-Ricardian household consists of 20% of households and in the second, it consists of 40% of households. Then, Ramsey optimal monetary policy was selected for these two scenarios. The results show that the when the percentage of non-Ricardian households in the model increases, monetary policy-maker deviates from targeting monetary variables and gives more importance to production targeting. Second, if Ramsey optimal monetary policy is chosen without considering the non-Ricardian household in the model, in facing the shock of falling oil prices, the shock of declining money demand and the shock of rising external inflation, the responses of the production and consumption sectors in scenarios 1 and 2 are significantly different from the baseline model. But the consumption and production sectors have almost the same reactions in three models in response to the shock of the rising nominal exchange rate.
Dr Sima Eskandari Sabzi,
Volume 22, Issue 3 (9-2022)
Volume 22, Issue 3 (9-2022)
Abstract
High and unpredictable inflation rates reduce the demand for domestic money and increase the demand for alternative assets such as foreign currency. Currency substitution is a situation in which foreign currency is replaced for domestic money in doing monetary functions. The purpose of this article is to investigate the factors affecting currency substitution in Iran, with emphasis on inflation uncertainty. For this purpose, based on the data of 1978-2018, the degree of currency substitution is obtained using the Kamin-Ericsson (2003) method and the EGARCH model is used to calculate inflation uncertainty. The estimation of an autoregressive distributed lag model show that in the short- and long-run, rising inflation leads to increased currency substitution. Inflation uncertainty in the short run increases currency substitution after three lags. In the long run, inflation uncertainty has a positive relationship and economic growth has a significant inverse relationship with currency substitution. Given the impact of inflation and its uncertainty on currency substitution, inflation control policies should be considered by policymakers.
Mohammadjavad Khosrosereshki, Dr Alireza Keikha,
Volume 22, Issue 4 (12-2022)
Volume 22, Issue 4 (12-2022)
Abstract
Introduction:
Exchange rate pass-through (ERPT) is one of the most important indicators for monetary policymakers that shows the impact of exchange rate volatility on price indices (such as CPI, PPI, etc.). The economic stability and inflation environment are two factors affecting ERPT. The lower the inflation environment, the lesser the ERPT. In an oil-exporting country, the long-run situation of oil revenues can be a state variable of the economy and affect the expectations of economic agents. Therefore, the purpose of this study is to investigate the effect of sanctions against Iran and oil revenues situation on the ERPT from 1990Q2 to 2021Q1.
Methodology:
Regarding the implementing date of sanctions (2012Q1), the sanction period is from 2012Q1 to 2021Q1. Considering Lucas' critique, the switching models are not appropriate, and separated models are preferred. Therefore, by using the Bai-Perron (2003) method and taking oil revenues as a state variable of economy, the rest of the period is separated into two periods. The first period (from 1990Q1 to 2000Q4) is the phase of shortage in oil revenues and the second period (from 2001Q1 to 2011Q4) is the phase of abundance in oil revenues. The inflation environment during sanctions and shortage in oil revenues was high, and it was low in the period of abundance in oil revenues.
The ERPT for each period was calculated using the Structural Vector Autoregressive (SVAR) model. Oil price gap is the exogenous variable and the endogenous variables are respectively as follows: USA GDP, USA CPI, domestic GDP, exchange rate, liquidity and domestic CPI. All variables are in the first difference of logarithmic form. The Cholesky decomposition were used. The optimal lags for each model were selected by Hannan-Quinn information criterion (HQ), Akaike information criterion (AIC) and Final Prediction Error (FPE).
In this model, ERPT is the ratio of the accumulated response of CPI to exchange rate structural shock.
To investigate the effect of endogenous variables shocks on domestic CPI, variance and historical decomposition are used. Finally, the autoregressive trend of imports for each period is calculated to explain the status of imports versus different oil revenues. These equations can explain the dependency of CPI to imports.
Results and Discussion:
Only the ERPT in the sanctions period has a long-run effect on the economy. This effect is about 43%. The ERPT is 9.9% for the period of shortage in oil revenues, 25.1% for the period of abundance in oil revenues and 10.1% for the sanctions period. Unlike most previous studies, the results show that the lower the inflation environment, the higher the ERPT, and the higher the inflation environment, the lower the ERPT. The main cause of these unexpected changes in ERPT is related to share of imports in consumption basket. The import trend, either in the sanctions or the shortage oil revenues period, was decreasing while in the abundant oil revenues period, was increasing.
The results of the variance and historical decomposition show that in the period of sanctions, the exchange rate structural shocks have the largest share in inflation shocks, while in the other two periods, the inflation structural shock has the largest share in inflation shocks.
Conclusion:
The central bank of Iran is using the nominal exchange rate as an anchor to limit inflation and, finally, increase the monetary policymaker's credibility. In Iran, increasing oil revenues leads to implementing the crawling peg exchange rate system instead of the managed floating exchange rate system, and consequently, not only the PPI inflation will be greater than the imported goods inflation, but also the imports will increasingly grow. Therefore, it is expected that the share of imports in the consumption basket grows and CPI will be more sensitive to imports. These results can explain the ERPT changes.
In order to increase the credibility of the monetary policy maker and reduce the ERPT sensitivity to oil revenue situations, instead of using the nominal exchange rate anchor, the central bank should be more independent, commit to implementing monetary policy. So, according to the real sector of the economy, the central bank should announce its goals in the short-run and commit to them and announce the status report at the appointed times, and in the medium run, the central bank should pursue only its goals implicitly and increase its credibility among economic agents by making the economy more predictable. The more independent the central bank is, the easier it will be to follow the above policy.
Mr. Alireza Zarifian Abhari, Dr Parastoo Mohammadi,
Volume 23, Issue 1 (3-2023)
Volume 23, Issue 1 (3-2023)
Abstract
Aim and Introduction:
The distribution of income and wealth in Iran is highly dependent on monetary policy. Iran's macroeconomic variables show that the country is experiencing an increase in inflation, liquidity and social inequality. Given that the facility repayment rate plays a role in channeling resources to investments, and given the role of the central bank in determining and regulating this variable in Iran, this study examines the impact of changing the facility repayment rate as a monetary policy tool on macroeconomics variables related to the distribution of income and wealth in society. The contribution of this research is to provide the agent-based model for Iran and to study the effects of different scenarios of decreasing, increasing and constant trend of facility repayment rate on the distribution of income and wealth, and other macroeconomic variables.
Methodology:
Two types of approaches can be used to model this problem: (1) simulation with the Dynamic Stochastic General Equilibrium (DSGE) approach and (2) simulation with the Agent-based Computational Economics (ACE) approach. DSGE models seek to find the optimal point, in which pricing is done through aggregating supply and demand by the Walrasian auctioneer, and none of the factors can decide on their variables. While in ACE simulations, changing process of variables and factors is examined and each factor has the ability to decide about its variables based on its observation of the system. The ACE approach has been used because of the proximity of the simulation to reality and the ability to examine the process. In this simulation, the effect of changing the facility repayment rate on the distribution of income and wealth and other macroeconomic variables is examined in three scenarios: decreasing, increasing and fixed facility repayment rate.
Agents that are considered in the proposed simulation are: (1) The Central bank as policy-maker agent that decides about facility repayment rate and money supply volume, (2) The bank is responsible for allocating credit to firms and depositing from households and distributing income from banking activities among depositors. It is also the responsibility of the bank to sell consumer goods and capital of bankrupt companies that have not been able to repay their facilities, (3) Firms are responsible for the production of consumer goods and capital and its sale in the market, and (4) A household that provides its labor force to firms in exchange for wages and provides consumer goods for its livelihood in the consumer goods market. In this simulation, policy-making is done by the central bank and the existence of the government, and fiscal policies are ignored and only the mentioned monetary policy (facility repayment rate) is investigated.
In this research, the market is defined in a way that each agent on the demand side observes a random list in terms of number of factors on the supply side and buys from the supplier agent that offers the lowest price. Model have 4 markets as follows: (1) the labor market, (2) consumer goods market, (3) capital goods market, and (4) credit market. The characteristic of this type of market is that the market mechanism is a random adaptation mechanism, and all agents on the demand side have incomplete information from suppliers and vice versa. None of agents see all the market prices and decide to buy only on the basis of incomplete observations of the system. Also, on the supplier side, the firm does not see the cumulative need of the market. It means that the firm estimates the amount of production for this period based solely on its own personal experience in the previous periods, and according to that estimate, it employs labor and produces goods and services. And firms set prices based on their experience on previous periods. This kind of market attitude in simulation has caused the simulated market to be closer to the real world.
Results and Discussion:
The result of this simulation shows that the repayment rate of incremental scenario caused the collapse of the simulation system and also the Gini coefficient increased, which indicates the disparity in the distribution of income and wealth in society. The fixed scenario does not show an effect on improving the Gini coefficient and on the other hand causes the bankruptcy of many firms in the long run. The best result is the reducing scenario. In this scenario, the system achieved sustainable economic growth, controlled liquidity, and a reduction in the Gini coefficient.
Conclusion:
In the absence of speculative markets, all the money generated in the banking system is directed to the production and development of economic activities. In addition, decreasing repayment rate of facilities can improve the distribution of income and wealth in society.
Mr. Mehdi Bakhtiar, Dr Rozita Moayedfar, Dr Mohammad Vaez Barzani, Dr Ramin Mojab,
Volume 23, Issue 1 (3-2023)
Volume 23, Issue 1 (3-2023)
Abstract
Aim and Introduction
Credit risk is the possibility of a loss resulting from a borrower's failure to repay a loan or meet contractual obligations. Traditionally, it refers to the risk that a lender may not receive the owed principal and interest, which results in an interruption of cash flows and increased costs for collection. Although it is impossible to know exactly who will default on obligations, properly assessing and managing credit risk can lessen the severity of a loss. Interest payments from the borrower or issuer of a debt obligation are a lender's or investor's reward for assuming credit risk.
When the borrower remains financially healthy and pays the agreed instalments and interest as scheduled, the loan is said to be performing. But there is always the risk that the company or individual will not be able to repay within the agreed timespan. If this happens or looks likely to happen, the bank must classify the loan as “non-performing”. A bank loan is considered non-performing when more than 90 days pass without the borrower paying the agreed instalments or interest. Non-performing loans are also called “bad debt”. To be successful in the long run, banks need to keep the level of bad loans at a minimum so they can still earn a profit from extending new loans to customers. If a bank has too many bad loans on its balance sheet, its profitability will suffer because it will no longer earn enough money from its credit business. In addition, it will need to put money aside as a safety net in case it needs to write off the full amount of the loan at some point in time.
Methodology
This study with a new approach examines the determinants of credit risk in Iranian banks from 2006 to 2019. Province, banking groups and time are three dimensions used in the modeling of this study as explanatory variables of credit risk. Furthermore, a three-dimensional panel data model is used to measure the coefficients of independent variables. In the case of two-dimensional panels, each observation is typically a vector of values of a dependent variable and one or more independent variables, and comes with two labels attached, one is frequently time and the other an individual person, business or nation. When the panel is multi-dimensional, each observation comes with many labels, for example, time, individual employee, firm, and industry. An observation could consist of values of multiple endogenous variables and multiple exogenous or predetermined variables, labeled with at least time and one other label. All of the problems and issues which arise for two-dimensional panels also exist for multi-dimensional panels.
Findings
The results of the study indicate that access to provincial credit has a positive effect and the size of the provincial banking sector has a negative impact on the provincial credit risk. In addition, among the variables of the regional economics, the provincial unemployment rate and the provincial real economic growth rate affect positively the provincial credit risk, and the provincial Gini coefficient variable affect negatively the provincial credit risk. The index of road network accessibility as a sensitive variable has a negative influence on the credit risk of the province, which means that in regions where the index of road network accessibility is larger, the cost of access for economic enterprises is reduced, so the profit margin and the ability to repay facilities by the enterprise increases and less default occurs.
Discussion and Conclusion
The banking system is subject to some risks in attaining its goals; one of the most important of which is encountering non-performing loans and ultimately write-offs. The emergence and accumulation of NPLs can become a systemic problem when this affects a considerable part of the financial system, threatening its stability and/or impairing its core function of facilitating financial intermediation. A significant increase in NPLs throughout the system can have a negative impact on the resilience of the banking sector to shocks, thus increasing systemic risk. NPLs may also be associated with higher funding costs and a lower supply of credit to the real economy. This may result from negative market sentiment towards banks with high levels of NPLs, which decreases banks’ ability to access liquidity and capital markets (potentially leading to credit supply constraints). In order to reduce credit risk, the necessary policies should be adopted to take into account the considerations of the regional economics in payment of facilities.
Credit risk is the possibility of a loss resulting from a borrower's failure to repay a loan or meet contractual obligations. Traditionally, it refers to the risk that a lender may not receive the owed principal and interest, which results in an interruption of cash flows and increased costs for collection. Although it is impossible to know exactly who will default on obligations, properly assessing and managing credit risk can lessen the severity of a loss. Interest payments from the borrower or issuer of a debt obligation are a lender's or investor's reward for assuming credit risk.
When the borrower remains financially healthy and pays the agreed instalments and interest as scheduled, the loan is said to be performing. But there is always the risk that the company or individual will not be able to repay within the agreed timespan. If this happens or looks likely to happen, the bank must classify the loan as “non-performing”. A bank loan is considered non-performing when more than 90 days pass without the borrower paying the agreed instalments or interest. Non-performing loans are also called “bad debt”. To be successful in the long run, banks need to keep the level of bad loans at a minimum so they can still earn a profit from extending new loans to customers. If a bank has too many bad loans on its balance sheet, its profitability will suffer because it will no longer earn enough money from its credit business. In addition, it will need to put money aside as a safety net in case it needs to write off the full amount of the loan at some point in time.
Methodology
This study with a new approach examines the determinants of credit risk in Iranian banks from 2006 to 2019. Province, banking groups and time are three dimensions used in the modeling of this study as explanatory variables of credit risk. Furthermore, a three-dimensional panel data model is used to measure the coefficients of independent variables. In the case of two-dimensional panels, each observation is typically a vector of values of a dependent variable and one or more independent variables, and comes with two labels attached, one is frequently time and the other an individual person, business or nation. When the panel is multi-dimensional, each observation comes with many labels, for example, time, individual employee, firm, and industry. An observation could consist of values of multiple endogenous variables and multiple exogenous or predetermined variables, labeled with at least time and one other label. All of the problems and issues which arise for two-dimensional panels also exist for multi-dimensional panels.
Findings
The results of the study indicate that access to provincial credit has a positive effect and the size of the provincial banking sector has a negative impact on the provincial credit risk. In addition, among the variables of the regional economics, the provincial unemployment rate and the provincial real economic growth rate affect positively the provincial credit risk, and the provincial Gini coefficient variable affect negatively the provincial credit risk. The index of road network accessibility as a sensitive variable has a negative influence on the credit risk of the province, which means that in regions where the index of road network accessibility is larger, the cost of access for economic enterprises is reduced, so the profit margin and the ability to repay facilities by the enterprise increases and less default occurs.
Discussion and Conclusion
The banking system is subject to some risks in attaining its goals; one of the most important of which is encountering non-performing loans and ultimately write-offs. The emergence and accumulation of NPLs can become a systemic problem when this affects a considerable part of the financial system, threatening its stability and/or impairing its core function of facilitating financial intermediation. A significant increase in NPLs throughout the system can have a negative impact on the resilience of the banking sector to shocks, thus increasing systemic risk. NPLs may also be associated with higher funding costs and a lower supply of credit to the real economy. This may result from negative market sentiment towards banks with high levels of NPLs, which decreases banks’ ability to access liquidity and capital markets (potentially leading to credit supply constraints). In order to reduce credit risk, the necessary policies should be adopted to take into account the considerations of the regional economics in payment of facilities.
Dr Hossein Asgharpur, Mr Saman Hatamrad, Mrs Zahra Mousavipour, Mr Mansour Heydari, Dr Jaafar Haghighat,
Volume 24, Issue 1 (3-2024)
Volume 24, Issue 1 (3-2024)
Abstract
Introduction
Iran's economy as an oil exporting country is highly dependent on intermediate and imported products. The volume of foreign trade plays a significant role in changes in economic growth and inflation rate. The trend of trade volume in Iran's economy indicates that various shocks have always been imposed on the economy. These shocks are significant from two perspectives. The first is that the size of the trade shocks was not the same, for example, in some cases, a positive shock was imposed on the economy due to the increase in oil revenues, while at other times, Iran's economy has experienced a negative shock due to various sanctions. The second important matter is that the intensity of trade shocks has been different in different time periods. Meanwhile, oil revenues have recorded significant figures between 2005 and 2013, but Iran has experienced a negative shock due to economic sanctions. Macroeconomics literature has indicated that the way of determining the exchange rate has an undeniable effect on the economy. The most important feature of the exchange rate in relation to trade openness and macroeconomic variables is the management of external shocks. Absorption of external shocks of flexible exchange regimes means that, when the real exchange rate or relative prices change with the external shock, automatic changes in the nominal exchange rate and flexible regimes make the necessary changes in the real exchange rate. Therefore, the effects of external shocks caused by the high volume of foreign trade can be reduced by a flexible exchange regime. In the system of flexible regimes, the negative shock causes the domestic demand and the sales of companies to decrease due to the increase in the exchange rate. In an open economy with a large number of producers, competitiveness increases and leads to the approximate compensation of the effect of the decrease in the domestic demand of the country. Therefore, in an open economy, flexible regimes absorb more shocks than fixed regimes. Conversely, in a closed economy where non-tradable goods dominate, fixed exchange rate regimes are better. Because they don't pay real depreciation rent. These concepts show that in relatively open countries, flexible regimes work better as a shock absorber and lead to better economic stability, and when the degree of trade volume is small, a fixed exchange regime leads to greater financial and economic stability. This study deals with the importance of the exchange rate channel in influencing the volume of foreign trade on Iran's economic growth and inflation.
Methodology
Iran's political and economic conditions have led to the imposition of several structural failures on the country's economy, and failure to pay attention to these conditions can lead to incorrect conclusions about Iran's economic facts. Therefore, due to changes in conditions, structural failures and cyclical changes in time series, it is better to use a model that can take these facts into account. TVP model can provide an estimate for each year by identifying the conditions of each period. The obtained coefficient, while specifying the positive and negative effects of the explanatory parameters on the dependent variable, also shows the intensity of the coefficients.
Results and Discussion
In this research, the role of exchange rate changes in influencing the volume of foreign trade on Iran's economic growth and inflation has been investigated. A TVP-VAR time series model is estimated for the period 1972-2021. The results show that with an increase in the volume of trade, if the exchange rate increases, the economic growth increases and the inflation rate decreases.
While with the increase in the volume of trade, if the suppression of the exchange rate is on the agenda, the inflation will increase sharply and the economic growth will decrease
Conclusion
According to the inverse effect of trade on inflation and the direct relationship between the exchange rate and inflation, it is recommended to expand the volume of foreign trade and control the exchange rate in order to curb the inflation rate. Also, with the knowledge of the positive role of the managed floating exchange regime in influencing trade on economic growth and the negative role of the suppressed exchange regime in influencing it, it is recommended to avoid the fixed exchange regime as much as possible.
Mrs Shokooh Mahmoodi, Dr. Seyed Abdulmajid Jalaee, Dr Zeinolabedin Sadeghi, Dr Alireza Shakibai,
Volume 24, Issue 1 (3-2024)
Volume 24, Issue 1 (3-2024)
Abstract
Introduction
Currently, 87 countries – representing more than 90% of global GDP – are considering central bank digital currency (CBDC). It is therefore crucial that central banks understand the implications of CBDCs for financial stability and monetary policy. CBDCs should not harm the country's economy. In particular, they should not become a source of financial disruption that could disrupt the transmission of monetary policy. Recently, the details of the Central Bank's digital currency, which is called "Digital Rial" in Iran, have been published by the Central Bank of Iran. This study seeks to examine the changes in the country's monetary policies with the introduction of the Digital Rial by the Central Bank using the system dynamics method. The results of this study show that with the issue of the Digital Rial, the increasing coefficient of money decreases and reduces the money supply, and because the Digital Rial has the same nature as banknotes and coins, it can reduce the power of banks in creating liquidity. As a result, the central bank can use Digital Rial as contractionary monetary policy tool to control inflation in the country.
Methodology:
In order to provide a working solution for the research problem and to understand the importance of the topic, this study tries to use the system dynamics method to present a dynamic model of the relationship between digital currencies and its effect on monetary policies in Iran's economy. System dynamics is a method for modeling systems using accumulation, state and flow variables, which was developed in the 1960s by Professor Jay Forrester at MIT University. This model became very famous in the 70s thanks to the publication of the book "Limits to Growth". This book used the system dynamics model to analyze the absurdity of the idea of unlimited growth. Today, the most comprehensive source for the system dynamics model is the book "Business Dynamics" by Professor John Sterman (2000, MIT University). System dynamics can model the technical and social aspects of complex systems created by the adoption of Bitcoin and other cryptocurrencies. The idea of interaction between factors related to human behavior and the (technical) framework of the system is a perfect way to study the economic dynamics of this new form of money.
Results and Discussion:
The results showed that with the issue of Digital Rial, the increasing coefficient of money decreases and money supply decreases, and because the Digital Rial has the same nature as banknotes and coins, it can reduce the power of banks to create liquidity. On the other hand, the estimates of this research showed that the effect of the ratio of banknotes and coins on the increasing coefficient was not significant, and also the increasing coefficient had less effect on the money supply in pre-2013 period, which can be attributed to the effect of the increasing effect of the money supply. Most of the banks know that in increasing the country's liquidity, the use and expansion of the Digital Rial as a contractionary monetary policy tool will be effective in the current economic conditions. Also, this effect can be more effective with the increase in the use of electronic payments and new banking methods, because in addition to facilitating exchanges and reducing money printing costs, the use of Digital Rials also has the advantages of current electronic payments, with the difference that this part of deposits is not under the control of banks and is kept in electronic wallets, so they will not have the power to create liquidity. Therefore, the effectiveness of this money depends on the choice of the central bank to deposit electronic wallets in commercial banks, as well as the volume of this money issue.
Conclusion:
Considering the effect of Digital Rial on monetary contraction, it is suggested to design effective incentives in the design of Digital Rial, because the expansion of the use of this currency can be effective in controlling inflation. Among these incentives, we can mention fixed fees and lower taxes in transactions compared to other means of payments or increasing the limit of convertible money. Also, the requirement to purchase certain goods only through Digital Rial and to designate special shopping centers that only pay with Digital Rial (similar to China's policies on the use of Chinese Yuan by people) can also be other incentives to use Digital Rial. Also, due to the facilitation and acceleration of exchanges, the expansion of the Digital Rial can be effective in controlling the money supply besides the advantages of electronic payment methods.
Currently, 87 countries – representing more than 90% of global GDP – are considering central bank digital currency (CBDC). It is therefore crucial that central banks understand the implications of CBDCs for financial stability and monetary policy. CBDCs should not harm the country's economy. In particular, they should not become a source of financial disruption that could disrupt the transmission of monetary policy. Recently, the details of the Central Bank's digital currency, which is called "Digital Rial" in Iran, have been published by the Central Bank of Iran. This study seeks to examine the changes in the country's monetary policies with the introduction of the Digital Rial by the Central Bank using the system dynamics method. The results of this study show that with the issue of the Digital Rial, the increasing coefficient of money decreases and reduces the money supply, and because the Digital Rial has the same nature as banknotes and coins, it can reduce the power of banks in creating liquidity. As a result, the central bank can use Digital Rial as contractionary monetary policy tool to control inflation in the country.
Methodology:
In order to provide a working solution for the research problem and to understand the importance of the topic, this study tries to use the system dynamics method to present a dynamic model of the relationship between digital currencies and its effect on monetary policies in Iran's economy. System dynamics is a method for modeling systems using accumulation, state and flow variables, which was developed in the 1960s by Professor Jay Forrester at MIT University. This model became very famous in the 70s thanks to the publication of the book "Limits to Growth". This book used the system dynamics model to analyze the absurdity of the idea of unlimited growth. Today, the most comprehensive source for the system dynamics model is the book "Business Dynamics" by Professor John Sterman (2000, MIT University). System dynamics can model the technical and social aspects of complex systems created by the adoption of Bitcoin and other cryptocurrencies. The idea of interaction between factors related to human behavior and the (technical) framework of the system is a perfect way to study the economic dynamics of this new form of money.
Results and Discussion:
The results showed that with the issue of Digital Rial, the increasing coefficient of money decreases and money supply decreases, and because the Digital Rial has the same nature as banknotes and coins, it can reduce the power of banks to create liquidity. On the other hand, the estimates of this research showed that the effect of the ratio of banknotes and coins on the increasing coefficient was not significant, and also the increasing coefficient had less effect on the money supply in pre-2013 period, which can be attributed to the effect of the increasing effect of the money supply. Most of the banks know that in increasing the country's liquidity, the use and expansion of the Digital Rial as a contractionary monetary policy tool will be effective in the current economic conditions. Also, this effect can be more effective with the increase in the use of electronic payments and new banking methods, because in addition to facilitating exchanges and reducing money printing costs, the use of Digital Rials also has the advantages of current electronic payments, with the difference that this part of deposits is not under the control of banks and is kept in electronic wallets, so they will not have the power to create liquidity. Therefore, the effectiveness of this money depends on the choice of the central bank to deposit electronic wallets in commercial banks, as well as the volume of this money issue.
Conclusion:
Considering the effect of Digital Rial on monetary contraction, it is suggested to design effective incentives in the design of Digital Rial, because the expansion of the use of this currency can be effective in controlling inflation. Among these incentives, we can mention fixed fees and lower taxes in transactions compared to other means of payments or increasing the limit of convertible money. Also, the requirement to purchase certain goods only through Digital Rial and to designate special shopping centers that only pay with Digital Rial (similar to China's policies on the use of Chinese Yuan by people) can also be other incentives to use Digital Rial. Also, due to the facilitation and acceleration of exchanges, the expansion of the Digital Rial can be effective in controlling the money supply besides the advantages of electronic payment methods.
Mr Farouq Mahmoudi-Razgeh, Dr Ali Rezazadeh, Dr Yousef Mohammadzadeh,
Volume 24, Issue 1 (3-2024)
Volume 24, Issue 1 (3-2024)
Abstract
رIntroduction
The tourism sector plays a pivotal role in national economic development because it promotes the development of related industries such as transportation. The boosting effect of tourism on economic growth is more obvious in developing countries with abundant tourism resources (Dieke, 2003). However, tourism development undergoes great dynamic changes due to complex and volatile external environments, such as global climate change and social disturbances with a high degree of uncertainty (Nguyen et al., 2020; Scott et al., 2019). thus, the tourism economy has become very fragile and has a weak ability to withstand risks from various sources (Wang et al., 2022). Therefore, this study attempts to examine the Indirect impact of tourism on economic vulnerability and other factors affecting economic vulnerability in selected developing countries over the period 1995-2021 by using a panel smooth transition regression model.
Methodology
In this study, the nonlinear threshold effect of tourism on economic vulnerability in selected developing countries is examined using a PSTR model. For this purpose, following Gonzalez et al. (2005) and Colletaz & Hurlin (2006), a PSTR model with two regimes and a transition function is defined. according to the study of Colletaz & Hurlin (2006), can be chosen among the explanatory variables, the lag of the dependent variable, or any other variable outside the model that is theoretically related to the model under study and causes a nonlinear relationship.
As mentioned earlier, another salient feature of the PSTR model is that it provides a parametric approach to cross-country heterogeneity and time instability of the slope coefficients, allowing the parameters to change smoothly as a function of the threshold variable
It is worth noting that the estimation of the parameters of the PSTR model consists in eliminating the individual effects by removing the individual means and then applying nonlinear least squares (NLS) to the transformed model (see for details, Gonzalez et al., 2005). This method is equivalent to maximum likelihood (ML) estimation in the case of normal errors.
Following Gonzalez et al. (2005), Colletaz & Hurlin (2006), and Jude (2010), the estimation steps of a PSTR model are as follows: First, the linearity test against PSTR is performed using Wald Tests (
Results and Discussion:
The results show that in the first regime, trade openness has a negative effect on economic vulnerability, which has decreased and turned positive after crossing the threshold location in the second regime. Government expenditure has a positive effect on economic vulnerability, and after crossing the threshold location and entering the second regime, its effect gradually decreased and became positive. Inflation coefficients in the regime had a negative and insignificant effect on economic vulnerability, which after crossing the threshold location and entering the second regime, its effect gradually decreased and became positive, but it was significant at the 10 percent level.
Also, the results show that before the threshold location and at low levels of tourism income, the logarithm of financial development has a negative and significant effect on economic vulnerability, and after the threshold location and entering the second regime, this effect is still negative and increases. The coefficients of the logarithm of total unemployment have a negative effect on economic vulnerability in the first regime and before the threshold location. By crossing the threshold location and entering the second regime, this effect decreases and becomes positive.
Conclusion
In this study, the threshold and Indirect effect of tourism on economic vulnerability in selected developing countries during 1995-2021 was investigated. For this purpose, the PSTR model provided and developed by Gonzalez et al. (2005) and Colletaz & Hurlin (2006) was used. The estimation results suggested a nonlinear relationship between trade openness, financial development, government spending, total unemployment, inflation and economic vulnerability. Moreover, considering a threshold with two regimes or a transition function is sufficient to investigate nonlinear behaviors. The results show that the threshold of the transition variable is equal to 3.1378 and the slope parameter is equal to 33.8978, which include only one transition function and only one threshold.
Considering the positive impact of tourism on financial development and government spending, it can be said that the development of tourism income can indirectly reduce the economic vulnerability of developing countries by increasing financial development and national income and adjusting industrial structures, while this mediating effect at the level Social does not appear. Therefore, it is suggested that considering that in developing countries where the overall economic strength of a country is weak, with low economic development, the development of international tourism should be cautious. The main task should be to create infrastructure and stimulate domestic consumption. Investment should be focused on industries such as manufacturing and financial development to increase the growth of GDP and improve people's quality of life. Physical needs are the most important factor to maintain economic stability and prevent economic vulnerability. For these countries, attention should be paid to domestic tourism by strengthening the construction of tourism service facilities, adjusting the structure of the tourism industry and ensuring the sustainable development of international tourism, while accelerating the development of domestic tourism.
From an institutional perspective, creating active employment policies to create preferential employment conditions for low-income people can further ensure the positive impact of low-level international tourism on economic vulnerability. Finally, regardless of the level of economic development, one should have a clear understanding of the performance of the tourism industry based on the state of the country. This is possible by correctly positioning the tourism industry and not exaggerating the role of tourism and not giving up on its development due to some negative factors. Economic vulnerability can be effectively reduced only by combining tourism with other industries and focusing on overall economic development.
Dr Saeed Samadi, Dr Leila Torki, Mrs Sahar Mahdian,
Volume 24, Issue 2 (5-2024)
Volume 24, Issue 2 (5-2024)
Abstract
Introduction:
In Islamic financial markets, Sukuk is the most important Islamic financial securities. Sukuk is designed in a way that is compatible with Islamic laws. These characteristics of sukuk have made it an attractive source of capital for issuers outside the Islamic world who seek to access the liquidity provided by Islamic investors. The sukuk instrument is a partial ownership in an asset (lease sukuk) or property interests (benefit sukuk) or participation in a business or project (participation sukuk). Sukuk diversifies investors' portfolios and offers opportunities to invest in new assets, and on the other hand, issuers can benefit from additional liquidity resulting from growing demand among a large number of investors. Institutions and individuals benefit from Sharia compliant investment tools. The main goal of this research is the comparative analysis of the impact of sukuk market development on bank profitability in Islamic and conventional banks.
Methodology:
. In order to achieve the above goal, the information of 15 countries in the Persian Gulf was analyzed in the period from 2014 to 2021. To test the hypotheses of the research, the multivariate regression method was used using the combined data method.
Results and Discussion:
The results of the research showed that the development of the sukuk market increases the profitability of Islamic banks. Also, the results showed that the development of sukuk market has no effect on the profitability of conventional banks. In addition, the results showed that the Covid-19 crisis does not moderate the impact of the development of the sukuk market on the profitability of Islamic and conventional banks.
Conclusion:
In general, it can be said that with the development of the sukuk market, the private sector is increasingly interested in this market, and it is expected that this market will take a large part of the society's liquidity. Financial institutions will also be interested in this market. The sukuk instrument is a partial ownership in an asset (lease sukuk) or property interests (benefit sukuk) or participation in a business or project (participation sukuk). Sukuk diversifies investors' portfolios and offers opportunities to invest in new assets, on the other hand, issuers can benefit from the increased liquidity resulting from the growing demand among a large number of institutional investors. and individuals to benefit from Sharia compliant investment instruments. Therefore, many companies are currently waiting to enter this market due to the greater diversity of the sukuk market compared to traditional bank loans. Sukuk is a financial instrument that allows market participants to obtain a large amount of money and capital from investors, which is possible through the development of a diverse structure of sukuk. Also, according to the presented results, the development of the sukuk market has not played an effective role in the profitability of banks against economic shocks and crises. Therefore, due to the limitations of the research regarding the limited time period and the difficulty of accessing the information related to the variables, one should act cautiously in generalizing the results to the periods before and after the scope of this research
In Islamic financial markets, Sukuk is the most important Islamic financial securities. Sukuk is designed in a way that is compatible with Islamic laws. These characteristics of sukuk have made it an attractive source of capital for issuers outside the Islamic world who seek to access the liquidity provided by Islamic investors. The sukuk instrument is a partial ownership in an asset (lease sukuk) or property interests (benefit sukuk) or participation in a business or project (participation sukuk). Sukuk diversifies investors' portfolios and offers opportunities to invest in new assets, and on the other hand, issuers can benefit from additional liquidity resulting from growing demand among a large number of investors. Institutions and individuals benefit from Sharia compliant investment tools. The main goal of this research is the comparative analysis of the impact of sukuk market development on bank profitability in Islamic and conventional banks.
Methodology:
. In order to achieve the above goal, the information of 15 countries in the Persian Gulf was analyzed in the period from 2014 to 2021. To test the hypotheses of the research, the multivariate regression method was used using the combined data method.
Results and Discussion:
The results of the research showed that the development of the sukuk market increases the profitability of Islamic banks. Also, the results showed that the development of sukuk market has no effect on the profitability of conventional banks. In addition, the results showed that the Covid-19 crisis does not moderate the impact of the development of the sukuk market on the profitability of Islamic and conventional banks.
Conclusion:
In general, it can be said that with the development of the sukuk market, the private sector is increasingly interested in this market, and it is expected that this market will take a large part of the society's liquidity. Financial institutions will also be interested in this market. The sukuk instrument is a partial ownership in an asset (lease sukuk) or property interests (benefit sukuk) or participation in a business or project (participation sukuk). Sukuk diversifies investors' portfolios and offers opportunities to invest in new assets, on the other hand, issuers can benefit from the increased liquidity resulting from the growing demand among a large number of institutional investors. and individuals to benefit from Sharia compliant investment instruments. Therefore, many companies are currently waiting to enter this market due to the greater diversity of the sukuk market compared to traditional bank loans. Sukuk is a financial instrument that allows market participants to obtain a large amount of money and capital from investors, which is possible through the development of a diverse structure of sukuk. Also, according to the presented results, the development of the sukuk market has not played an effective role in the profitability of banks against economic shocks and crises. Therefore, due to the limitations of the research regarding the limited time period and the difficulty of accessing the information related to the variables, one should act cautiously in generalizing the results to the periods before and after the scope of this research
Dr Hossein Samsami Mazreeh Akhoond, Mr Ahmad Bakhtiyari,
Volume 24, Issue 2 (5-2024)
Volume 24, Issue 2 (5-2024)
Abstract
Introduction
The volume of the external money supply is determined by the policymaker, but the amount of money and liquidity will be influenced by the individual's decision to combine their portfolios and the behavior of banks (through lending channels and balance sheets) in the internal money supply. From this perspective, the initial change in external currency (monetary base) causes changes in the supply and demand of all types of assets (such as external and internal money) and their rate of return, and the behavior of individuals and banks determines the optimal composition of the portfolio of assets of individuals and banks and the new and balanced composition of liquidity volume. . Due to differences in the structure of the economy in different countries, the external currency itself can be created from different origins, the exogenous increase of each component of the central bank's asset column (monetary base) causes a change in the relative supply of that asset and its rate of return. Liquidity changes have different sources and are due to changes in the supply of different assets that make up different components of liquidity resources and since the components of liquidity resources are not of the same kind and originate from different processes can have different effects on the performance of macroeconomic variables. The purpose of this article is to analyze and investigate the mechanism of the effect of the components of liquidity resources on the macroeconomic variables of Iran. Changes in liquidity have different sources and are caused by changes in the supply of different assets that form different components of liquidity
sources and can have different effects on the performance of macroeconomic variables. For this purpose, a macroeconomic model by including the components of liquidity resources including net foreign assets of the central bank, net foreign assets of banks and non-bank credit institutions, net debt of the public sector to the central bank, net debt of the public sector to banks and non-bank credit institutions and Non-governmental sector debt is designed to show the relationships of economic variables in the framework of a dynamic stochastic general equilibrium model provides.
Methodology
The model presented in this research is a small open economy consisting of six sectors of households, firms, foreign sectors, banks and credit institutions, government and central bank within the framework of dynamic stochastic general equilibrium model of new Keynesians with respect to nominal and real frictions. By optimizing the objective functions of each of the above brokers, the result of the obtained economic relations is a system of nonlinear differential equations under rational expectations that are currently not empirically solvable, especially in larger patterns. But we can use approximation technique to calculate the model solution in the approximate range functionally. In this research, the set of equations is linear logarithmic using the Ahlik method (1999). In the next step, the input values of the pattern and calibration of parameters and variables have been done using the Iranian economy data during the period 2000-2020. Then, using the Dynar software, the system of equations based on the Bunchard-Kahn method is solved. The results of the statistical tests and moments indicate that the proposed model is suitable for simulating Iran's economy.
Results and Discussion
In order to evaluate the different effects of liquidity resources on economic variables, the reaction of these variables to liquidity component shocks based on instantaneous reaction functions has been investigated. The findings of the research show that the net assets of the banking system through balance of payments and net debt to the banking system through the channel of the state financial balance, if the source of liquidity is created, increases the variables of production, consumption and investment and causes mild growth or decrease of inflation and exchange rate variables. However, if the source of the liquidity creation of non-governmental debts is from the channel of facilitation, it has a decreasing effect on the variables of production, consumption and investment, and only increases inflation and exchange rate. The two sources of the net assets of the banking system and the net of government liabilities to the banking system, contrary to the source of non-governmental sector debt due to the creation of added value in the economy, have more productive effects and investment and less inflationary effects, hence, macroeconomic stability will bring.
Conclusion
The reaction of macroeconomic variables for the same liquidity growth based on instantaneous reaction functions shows that different components of liquidity sources have different effects on macroeconomic variables. These results carry the policy message that, in addition to liquidity management, attention to the developments in liquidity resources components is also important in the field of monetary policy. Considering that liquidity has increased by about 5% in all five components of liquidity components, the effects and implications of the five components of liquidity creation sources can be examined. Comparative results indicate that for the specific growth of liquidity, the increases caused by the net assets of the banking system and the net of public sector liabilities to the banking system have more productive and investment effects and less inflationary effects, hence macroeconomic stability. Therefore, it is recommended that the monetary transition policy as much as possible prevent the increase in non-governmental sector debt which leads to increased liquidity.
The volume of the external money supply is determined by the policymaker, but the amount of money and liquidity will be influenced by the individual's decision to combine their portfolios and the behavior of banks (through lending channels and balance sheets) in the internal money supply. From this perspective, the initial change in external currency (monetary base) causes changes in the supply and demand of all types of assets (such as external and internal money) and their rate of return, and the behavior of individuals and banks determines the optimal composition of the portfolio of assets of individuals and banks and the new and balanced composition of liquidity volume. . Due to differences in the structure of the economy in different countries, the external currency itself can be created from different origins, the exogenous increase of each component of the central bank's asset column (monetary base) causes a change in the relative supply of that asset and its rate of return. Liquidity changes have different sources and are due to changes in the supply of different assets that make up different components of liquidity resources and since the components of liquidity resources are not of the same kind and originate from different processes can have different effects on the performance of macroeconomic variables. The purpose of this article is to analyze and investigate the mechanism of the effect of the components of liquidity resources on the macroeconomic variables of Iran. Changes in liquidity have different sources and are caused by changes in the supply of different assets that form different components of liquidity
sources and can have different effects on the performance of macroeconomic variables. For this purpose, a macroeconomic model by including the components of liquidity resources including net foreign assets of the central bank, net foreign assets of banks and non-bank credit institutions, net debt of the public sector to the central bank, net debt of the public sector to banks and non-bank credit institutions and Non-governmental sector debt is designed to show the relationships of economic variables in the framework of a dynamic stochastic general equilibrium model provides.
Methodology
The model presented in this research is a small open economy consisting of six sectors of households, firms, foreign sectors, banks and credit institutions, government and central bank within the framework of dynamic stochastic general equilibrium model of new Keynesians with respect to nominal and real frictions. By optimizing the objective functions of each of the above brokers, the result of the obtained economic relations is a system of nonlinear differential equations under rational expectations that are currently not empirically solvable, especially in larger patterns. But we can use approximation technique to calculate the model solution in the approximate range functionally. In this research, the set of equations is linear logarithmic using the Ahlik method (1999). In the next step, the input values of the pattern and calibration of parameters and variables have been done using the Iranian economy data during the period 2000-2020. Then, using the Dynar software, the system of equations based on the Bunchard-Kahn method is solved. The results of the statistical tests and moments indicate that the proposed model is suitable for simulating Iran's economy.
Results and Discussion
In order to evaluate the different effects of liquidity resources on economic variables, the reaction of these variables to liquidity component shocks based on instantaneous reaction functions has been investigated. The findings of the research show that the net assets of the banking system through balance of payments and net debt to the banking system through the channel of the state financial balance, if the source of liquidity is created, increases the variables of production, consumption and investment and causes mild growth or decrease of inflation and exchange rate variables. However, if the source of the liquidity creation of non-governmental debts is from the channel of facilitation, it has a decreasing effect on the variables of production, consumption and investment, and only increases inflation and exchange rate. The two sources of the net assets of the banking system and the net of government liabilities to the banking system, contrary to the source of non-governmental sector debt due to the creation of added value in the economy, have more productive effects and investment and less inflationary effects, hence, macroeconomic stability will bring.
Conclusion
The reaction of macroeconomic variables for the same liquidity growth based on instantaneous reaction functions shows that different components of liquidity sources have different effects on macroeconomic variables. These results carry the policy message that, in addition to liquidity management, attention to the developments in liquidity resources components is also important in the field of monetary policy. Considering that liquidity has increased by about 5% in all five components of liquidity components, the effects and implications of the five components of liquidity creation sources can be examined. Comparative results indicate that for the specific growth of liquidity, the increases caused by the net assets of the banking system and the net of public sector liabilities to the banking system have more productive and investment effects and less inflationary effects, hence macroeconomic stability. Therefore, it is recommended that the monetary transition policy as much as possible prevent the increase in non-governmental sector debt which leads to increased liquidity.