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Dr Leila Torki, Mrs. Vala Sanizadeh,
Volume 23, Issue 1 (3-2023)
Volume 23, Issue 1 (3-2023)
Abstract
Aim and Introduction:
The choice between interest rate and money supply as the objective of monetary policy has always been a question in economic literature. Based on the results of many economic studies, the interest rate is a more appropriate target. Due to the instability of the demand for money, since the mid-1980s, the money supply has lost its generality, and instead, the use of interest rates has been used.
In Iran's economy, due to the prohibition of using bonds because of their usurious nature and determining the interest rates of bank deposits in a mandatory manner, it has not been possible to use the interest rate as the goal of monetary policy in recent years. In most of the researches, the monetary base growth rate is used as the target of the central bank's monetary policy. This research tries to use dynamic stochastic general equilibrium approach in Iran, to examine the effects of implementing monetary policy through the regulated interbank interest rate and transaction of government debt securities and to compare its effects on the macroeconomic variables with the effects of common monetary policy of the central bank (setting the growth rate of the monetary base through changing the rate legal reserve). Methodology: In this research, a stochastic dynamic general equilibrium model of an open economy has been designed to analyze the effects of different monetary policy regimes on the macro variables of the Iranian economy. This model analyzes the characteristics of the Iranian economy such as the dependency on oil revenues, the persistent budget deficit and the misalignment of central bank's balance sheet. Also, based on the new Keynesian school, price stickiness has been considered in the model by Calvo's method (1983) for domestic, import and export intermediary companies. Results and Discussion: According to the graphs of impulse-response functions, as a result of the positive impulse of the interbank interest rate, the demand of banks for borrowing and the monetary base are reduced. The bank resources are limited, and the facilities granted to the companies are reduced. Due to the stability of the company's demand, as a result of the additional demand for facilities, the interest rate of the facilities will increase. By reducing the facilities granted to companies, the company must hire fewer factors based on optimization due to the higher cost of financing. The demand and wages of household labor will decrease. Due to the decrease in the demand for labor and capital by the company, the non-oil production also decreases. As a result, the inflation rate increases with the decrease in supply. On the other hand, with an increase in the real interest rate based on Euler's relationship and a decrease in household income due to a decrease in wages and employment of labor by companies, consumer spending decreases. Therefore, in response to the decrease in the demand of the whole economy, the price level gradually decreases and the economy returns to equilibrium. Due to the fact that in the model, imports are limited to consumer goods, with the reduction of household consumption expenses, imports also decrease. According to the graphs of the impulse response function, with the increase in the growth rate of the monetary base, the resources available to banks increase, and bank facilities get available to companies in order to cover expenses. The facilities granted to the companies will increase, and due to the constant demand of the company, the cost of financing will decrease by reducing the interest rate of the facilities. As a result of optimization, by reducing the final cost of hiring agents, the company should employ more agents. So, the demand for household labor will increase. By hiring more factors by the company, non-oil production in the economy increases after impulse. Conclusion: The positive impulse of the interest rate of the interbank market (as a contractionary policy of the central bank) has a negative effect on the non-oil production by increasing the cost of financing of companies and reducing the facilities granted. As the supply of the entire economy decreases, the inflation rate also increases after the impulse is applied. The positive momentum of the growth rate of the monetary base (as the central bank's expansionary policy) is expected to increase the lending of banks, and to reduce the interest rate of the facilities, if bank resources increase. By comparing these impulse response functions under the application of each monetary policy regime, it seems that the effect of the impulse of the monetary base growth rate compared to the impulse of the interbank interest rate on the economy disappears in shorter periods. These results are expected due to the fact that the targeting of interbank interest rates has less effect on the macroeconomic variables in Iran due to the restrictions on the issuance of government debt bonds and the implementation of open market operations by the central bank.
Mrs. Marzieh Rafiean Esfahani, Dr Saeed Daei Karimzadeh, Dr Mahshid Shaahchera, Dr Sara Ghobadi,
Volume 23, Issue 2 (5-2023)
Volume 23, Issue 2 (5-2023)
Abstract
Aim and Introduction
Over the past two decades, the banking system around the world has undergone significant changes in its operating environment, and several internal and external factors have influenced its structure and performance. Despite all these changes, the banking system remains the main source of financing economic activities in many countries. Therefore, evaluating the performance of the banking system is important. Profitability is one of the influential factors in evaluating the performance of banks. Thus, it is necessary to know the effective internal and external factors. The main purpose of this paper is to evaluate the impact of the concentration index on the profitability of the banking industry. On the other hand, banks as established and organized institutions play an important role in attracting stagnant capital and transferring it to productive sectors, as well as meeting the needs of investors. Since a competitive environment in the banking system can increase efficiency and facilitate financial transactions, identifying the market structure of the banking industry is important for policymakers and banking operators, because it can be the way to remove the obstacles in creating a competitive market.
The policy makers could be selected the polices that achevied the economic goles.
Methodology
In order to achieve this goal, the impact of factors affecting the risk and profitability of banks, we especially use the concentration index as one of the dimensions of the market structure in the banking industry. The method of estimation is generalized method of moments (GMM).
For this purpose, concentration in the banking industry has been measured using the Herfindahl-Hirschman index. In addition, six control variables including capital adequacy, central bank assets ratio, deposit ratio, liquid assets ratio, credit ratio and cost-to-income ratio have been selected as explanatory-control variables. In this way, the explanatory variables of banks' profitability include bank-specific factors. Return on total assets and bank stability index have been used as profitability and risk criteria of banks. Also, the situation of the organized monetary market of 52 countries of the Organization of Islamic Cooperation was studied over the period 2005-2019.
Findings
Based on the findings of the research, the effects of independent variables in the profitability model are statistically significant and have positive effects on the profitability of banks. Regarding the main hypothesis of the research, i.e. the effect of the concentration index on the profitability of the banking system, it can be seen that the increase in market concentration has increased the profitability, which has a significant coefficient of 0.003817, which confirms the Structure-Conduct-Performance(SCP) hypothesis. In other words, based on this hypothesis, as the degree of market competition decreases, it becomes possible to earn higher profits. In addition, independent variables with lag of time (banking stability index, capital adequacy and return on assets) and the ratio of loans to deposits and the ratio of central bank assets have positive and significant impacts on risk.
Discussion and Conclusion
Experimental results have shown that the each of the independent variables has positive and significant effect on risk and profitability. The estimation results have shown the positive effect of the market concentration index on banks' profitability. In this way, in the periods when the concentration in the banking industry is higher, the profitability of the banks is high and with the increase in the level of concentration, the profitability of the banks has increased. As stated in the theoretical foundations, there are various theories regarding the relationship between concentration and profitability of banks. Although these theories differ on how to create this relationship, almost all of them emphasize that increasing concentration increases the profitability of banks and reduces competition. In other words, these theories predict that the relationship between concentration and profitability is positive. The result of fitting the research model shows a positive and significant effect of the concentration index on the return on total assets. This means that increasing market concentration has increased profitability. According to the obvious realities in the economies of the sample countries, the intensity of concentration in the banking industry have significant consequences for the profitability of banks by affecting the efficiency and effectiveness of resources.
Keywords: Banking System, Profitability, Risk Management, Concentration Index
JEL Classification: G21, G32, G38
Over the past two decades, the banking system around the world has undergone significant changes in its operating environment, and several internal and external factors have influenced its structure and performance. Despite all these changes, the banking system remains the main source of financing economic activities in many countries. Therefore, evaluating the performance of the banking system is important. Profitability is one of the influential factors in evaluating the performance of banks. Thus, it is necessary to know the effective internal and external factors. The main purpose of this paper is to evaluate the impact of the concentration index on the profitability of the banking industry. On the other hand, banks as established and organized institutions play an important role in attracting stagnant capital and transferring it to productive sectors, as well as meeting the needs of investors. Since a competitive environment in the banking system can increase efficiency and facilitate financial transactions, identifying the market structure of the banking industry is important for policymakers and banking operators, because it can be the way to remove the obstacles in creating a competitive market.
The policy makers could be selected the polices that achevied the economic goles.
Methodology
In order to achieve this goal, the impact of factors affecting the risk and profitability of banks, we especially use the concentration index as one of the dimensions of the market structure in the banking industry. The method of estimation is generalized method of moments (GMM).
For this purpose, concentration in the banking industry has been measured using the Herfindahl-Hirschman index. In addition, six control variables including capital adequacy, central bank assets ratio, deposit ratio, liquid assets ratio, credit ratio and cost-to-income ratio have been selected as explanatory-control variables. In this way, the explanatory variables of banks' profitability include bank-specific factors. Return on total assets and bank stability index have been used as profitability and risk criteria of banks. Also, the situation of the organized monetary market of 52 countries of the Organization of Islamic Cooperation was studied over the period 2005-2019.
Findings
Based on the findings of the research, the effects of independent variables in the profitability model are statistically significant and have positive effects on the profitability of banks. Regarding the main hypothesis of the research, i.e. the effect of the concentration index on the profitability of the banking system, it can be seen that the increase in market concentration has increased the profitability, which has a significant coefficient of 0.003817, which confirms the Structure-Conduct-Performance(SCP) hypothesis. In other words, based on this hypothesis, as the degree of market competition decreases, it becomes possible to earn higher profits. In addition, independent variables with lag of time (banking stability index, capital adequacy and return on assets) and the ratio of loans to deposits and the ratio of central bank assets have positive and significant impacts on risk.
Discussion and Conclusion
Experimental results have shown that the each of the independent variables has positive and significant effect on risk and profitability. The estimation results have shown the positive effect of the market concentration index on banks' profitability. In this way, in the periods when the concentration in the banking industry is higher, the profitability of the banks is high and with the increase in the level of concentration, the profitability of the banks has increased. As stated in the theoretical foundations, there are various theories regarding the relationship between concentration and profitability of banks. Although these theories differ on how to create this relationship, almost all of them emphasize that increasing concentration increases the profitability of banks and reduces competition. In other words, these theories predict that the relationship between concentration and profitability is positive. The result of fitting the research model shows a positive and significant effect of the concentration index on the return on total assets. This means that increasing market concentration has increased profitability. According to the obvious realities in the economies of the sample countries, the intensity of concentration in the banking industry have significant consequences for the profitability of banks by affecting the efficiency and effectiveness of resources.
Keywords: Banking System, Profitability, Risk Management, Concentration Index
JEL Classification: G21, G32, G38
Mr. Reza Shakeri Bostanabad, Dr. Vahideh Ansari, Dr. Habiboallah Salami, Dr Seyed Safdar Hoseini,
Volume 23, Issue 3 (8-2023)
Volume 23, Issue 3 (8-2023)
Abstract
Introduction
Evaluating the effects and consequences of the policies at the macro-economic level and examining their possible weaknesses are necessary for implementing successful economic policies. For this purpose, the existence of a set of data to perform various economic analyzes enables economic policy-makers to evaluate the effects of economic policies before and after their implementation. Financial Social Accounting Matrix (FSAM) is a combination of funds flow and social accounting matrix for macroeconomics that provides details of real and financial transactions and flows. The addition of financial transactions (financial institutions and financial instruments) allows SAM to simulate the impact of exogenous economic and financial shocks on the economy. Therefore, the creation of a new data framework, new tools and methods that covers the financial market and its relationship with other economic systems is necessary to review economic policies and decisions. Therefore, the present study aims to create FSAM for Iran and, while evaluating the impact of financial accounts in economic analysis, to measure the effects of the development of raw and processed food exports on the growth of production of economic activities. Also, for updating FSAM data, in this study, the supply and use tables of Iran's economy are also updated, so that Iran's financial social accounting matrix is compiled with the most up-to-date information possible.
Methodology
Using the input-output table is necessary to compile the parts of the exchanges of the real part of the social financial accounting matrix. These tables need to be updated due to the time gap between the statistical base year and the year of their publication. Therefore, in this study, the updated supply and use table of Iran's economy for 2018 was prepared using the RAS method. After updating the supply and consumption tables, the social financial accounting matrix of Iran with dimensions of 268*268 [taking into account 126 goods and services, 79 activities, 3 factors of production (labor, land and capital), 20 household deciles (10 urban and 10 rural deciles) and 8 financial instruments (gold and special drawing rights, cash and deposits, government bonds, shares, loans, legal reserves, insurance technical reserves and other accounts receivable/payable)] was made.
Results and Discussion
According to FSAM coefficients, if the demand for crops (for any reason such as increase in government demand or export) increases by 1000 Rials, the production of agricultural activities will increase by 1039 Rials and the production of horticultural activities will increase by 80 Rials. The effect of this increase in demand on animal husbandry, forestry, fishing, mining and food production is equal to 178, 2, 21, 218 and 237 Rials, respectively. Totally, the increase in the demand of crops by 1000 Rials increases the production of the whole economy by 3746 Rials. Comparison of SAM and FSAM coefficients showed that the coefficients in all accounts in the FSAM model are higher than in the SAM model, which indicates the important role of financial flows in the economy. In order to investigate the effect of the increase in the export of the studied products on the production of the entire economy, the amount of export of these products in 2017 and their coefficients at the level of the entire economy have been used. For this purpose, an increase shock of 10% has been applied to the initial export of these products, and the results of the increase in production were calculated based on the increasing coefficients of FSAM and SAM. The results show that due to the 10% increase in the export of each of the examined products, the largest increase in production at the economic level is achieved due to the development of the export of food industry products, and the total production of the economy increases by 82901 billion Rials.
Conclusion
The results showed that the coefficients in all accounts in the FSAM model are higher than in the SAM model, which indicates the important role of financial flows in the economy. In fact, the development of integrated financial information at the national level is to understand the interrelationship between the real and financial aspects of the economy. In the framework of FSAM, the savings of the internal institutions of the society, which are not allocated to the formation of gross fixed capital, are given to the specific productive sector through the financial markets; and in a positive cycle, it leads to more investment, more production and more income, and creates a connection between the real and financial part of the economy. Therefore, these considerations in the social financial accounting matrix have increased the coefficients of the studied products. Considering the significant impact of financial flows and the effects of financial accounts and financial investment of institutions, the use of FSAM can provide a comprehensive framework for evaluating the structural characteristics of Iran's economy and the relationship between socio-economic components.
Evaluating the effects and consequences of the policies at the macro-economic level and examining their possible weaknesses are necessary for implementing successful economic policies. For this purpose, the existence of a set of data to perform various economic analyzes enables economic policy-makers to evaluate the effects of economic policies before and after their implementation. Financial Social Accounting Matrix (FSAM) is a combination of funds flow and social accounting matrix for macroeconomics that provides details of real and financial transactions and flows. The addition of financial transactions (financial institutions and financial instruments) allows SAM to simulate the impact of exogenous economic and financial shocks on the economy. Therefore, the creation of a new data framework, new tools and methods that covers the financial market and its relationship with other economic systems is necessary to review economic policies and decisions. Therefore, the present study aims to create FSAM for Iran and, while evaluating the impact of financial accounts in economic analysis, to measure the effects of the development of raw and processed food exports on the growth of production of economic activities. Also, for updating FSAM data, in this study, the supply and use tables of Iran's economy are also updated, so that Iran's financial social accounting matrix is compiled with the most up-to-date information possible.
Methodology
Using the input-output table is necessary to compile the parts of the exchanges of the real part of the social financial accounting matrix. These tables need to be updated due to the time gap between the statistical base year and the year of their publication. Therefore, in this study, the updated supply and use table of Iran's economy for 2018 was prepared using the RAS method. After updating the supply and consumption tables, the social financial accounting matrix of Iran with dimensions of 268*268 [taking into account 126 goods and services, 79 activities, 3 factors of production (labor, land and capital), 20 household deciles (10 urban and 10 rural deciles) and 8 financial instruments (gold and special drawing rights, cash and deposits, government bonds, shares, loans, legal reserves, insurance technical reserves and other accounts receivable/payable)] was made.
Results and Discussion
According to FSAM coefficients, if the demand for crops (for any reason such as increase in government demand or export) increases by 1000 Rials, the production of agricultural activities will increase by 1039 Rials and the production of horticultural activities will increase by 80 Rials. The effect of this increase in demand on animal husbandry, forestry, fishing, mining and food production is equal to 178, 2, 21, 218 and 237 Rials, respectively. Totally, the increase in the demand of crops by 1000 Rials increases the production of the whole economy by 3746 Rials. Comparison of SAM and FSAM coefficients showed that the coefficients in all accounts in the FSAM model are higher than in the SAM model, which indicates the important role of financial flows in the economy. In order to investigate the effect of the increase in the export of the studied products on the production of the entire economy, the amount of export of these products in 2017 and their coefficients at the level of the entire economy have been used. For this purpose, an increase shock of 10% has been applied to the initial export of these products, and the results of the increase in production were calculated based on the increasing coefficients of FSAM and SAM. The results show that due to the 10% increase in the export of each of the examined products, the largest increase in production at the economic level is achieved due to the development of the export of food industry products, and the total production of the economy increases by 82901 billion Rials.
Conclusion
The results showed that the coefficients in all accounts in the FSAM model are higher than in the SAM model, which indicates the important role of financial flows in the economy. In fact, the development of integrated financial information at the national level is to understand the interrelationship between the real and financial aspects of the economy. In the framework of FSAM, the savings of the internal institutions of the society, which are not allocated to the formation of gross fixed capital, are given to the specific productive sector through the financial markets; and in a positive cycle, it leads to more investment, more production and more income, and creates a connection between the real and financial part of the economy. Therefore, these considerations in the social financial accounting matrix have increased the coefficients of the studied products. Considering the significant impact of financial flows and the effects of financial accounts and financial investment of institutions, the use of FSAM can provide a comprehensive framework for evaluating the structural characteristics of Iran's economy and the relationship between socio-economic components.
Mrs. Nooshin Bagheri Zamani, Dr. Hooshang Shajari, Dr. Morteza Sameti, Dr. Zahra Zamani,
Volume 23, Issue 4 (12-2023)
Volume 23, Issue 4 (12-2023)
Abstract
Introduction:
The return of the stock market is affected by several factors; although some of which are not economic, they strongly affect the financial markets. The Covid-19 epidemic is also among these factors that has severely affected the global economy, empathetically the financial markets. Therefore, considering the importance of this epidemic in the stock market, the current study evaluates the effects of the Covid-19 epidemic crisis on the stock return index of the financial markets of China, America, and France; besides, it examines its spillover effects on Iran. To investigate the contagion of turbulence and the direction of spillover from the mentioned countries to Iran, the weekly data of the stock return index available on the websites of the Iranian Stock Exchange have been used. Moreover, the stock exchange of foreign countries during two periods: before the outbreak of the Covid-19 epidemic (January 2018 to December 2019) and the time of the outbreak of the Covid-19 epidemic (January 2020 to December 2021) have been examined. Then Oxmetrics software was used to check the conditional correlation, and SPSS software was used to measure the stationarity and unconditional correlation. Methodology:
The present research evaluates the spillover effects of the covid-19 epidemic on the stock return index of the financial markets of China, America, and France and examines the mutual relationship between the aforementioned countries and Iran using the weekly stock return data of Iran and foreign countries. It has been analyzed using (DCC-GARCH) and (CCC-GARCH) models.
Results and Discussion:
In this article, αii represents the effects of arch in each of the variables' past period turbulences, and αij represents the effects of the shock of variable i on the current shock of variable j. This spillover effect is calculated as the square of the residuals arising from the forecasted yield patterns. Garch effects are considered as βii. In other words, βii shows the stability of the shock in each of the series.
ρij also expresses the conditional correlation between two variables, which provides a representation of their simultaneous movement. Of course, both terms αij and β can indicate the overflow between indicators, because the shock overflow effect is determined by non-diagonal values. In the constant conditional correlation model, coefficients αii and βii are significant. In other words, they represent the amount of shock transmission in the conditional shocks of countries' returns.
Conclusion:
The results indicate that in the post-epidemic period, the Iranian stock market experienced a decrease in stock returns, which can be caused by factors such as the imposition of sanctions and the stagnation of economic activities in addition to the spread of Covid-19. Also, the collapse of the Iranian stock market, which occurred in August 2019, led to the confusion and pessimism of more and more investors and finally led to the withdrawal of capital from the stock market. In such an uncertain and chaotic atmosphere, the spread of Covid-19 also aggravated the existing conditions due to the restrictions and also the implementation of government quarantines. Also, the results show that at the moment of the outbreak of the Covid-19 virus, all the sample countries have faced a decrease in stock returns. During the covid-19 epidemic, the impact of the Iranian stock market on China has been greater than that of other studied countries, which is important because China and Iran are each other's trading partners. It should be mentioned that during this period due to restrictions on the borders, the relationship between Iran and China became prominent. Also, Iran's stock market is not strong enough to influence global financial markets including China, America and France.
The growth of the stock return index has been increasing during the four-year period (2018-2021) in China, America and France, however the stock return index of Iran has been decreasing. The growth of China's stock returns during this period has been higher than that in the other studied countries. Also, the stock return index of all sample countries has faced a decrease in the stock returns during the outbreak of Covid-19.
Dr Amineh Mahmoudzadeh, Mr Kamyab Rajabizadeh, Dr Majid Einian,
Volume 24, Issue 4 (12-2024)
Volume 24, Issue 4 (12-2024)
Abstract
Aim and introduction
The conventional notion of the permanent income hypothesis is that individuals aim to smooth their consumption over time, demonstrating resistance to fluctuations in income. This foundational concept assumes that individuals utilize savings or credit when faced with expected income changes or temporary income shocks, preserving their ultimate well-being. However, empirical evidence challenges this hypothesis, revealing that consumers often exhibit responsiveness to income changes, both expected and temporary. This phenomenon is called "excess sensitivity of consumption". Various factors underpin this apparent excess sensitivity of consumption, encompassing demographic dynamics, labor market decisions, reliance on aggregated data, superior information within households, income measurement inaccuracies, and liquidity constraints.
Methodology
This study employs the Panel-IV method to estimate the coefficient of excess sensitivity of consumption. It utilizes two financial development indicators, namely access to financial services and financial depth, to evaluate their impact on this coefficient. The significance of this investigation lies in the Iranian economic history, which witnessed financial development in the late 1990s, followed by a financial downturn. The data are derived from household income and expenditure surveys conducted by the Iranian Statistical Center. The analysis encompasses the years 2004 to 2020. These surveys incorporate data on various aspects of household’s financial information, including the amount and number of loans received and essential details about their employment status.
Due to the cross-sectional nature of the data, it is imperative to use a pseudo-panel approach, providing several advantages. First, it eliminates the individual-specific measurement errors. Second, it mitigates the issues arising from the short time series data, which can lead to estimation errors. Previous research has estimated the coefficient of excess sensitivity of consumption. However, this study contributes by examining the effects of financial development on consumption smoothing in the Iranian economy. Notably, previous research in Iran focused solely on estimating the coefficient of excess sensitivity of consumption without investigating the influence of financial development.
Findings
The findings indicate the excess sensitivity of consumption coefficient is 0.266 for the Iranian households. In practical terms, a 10% expected increase in income results in a 2.66% increase in consumption. This finding indicates liquidity constraints faced by the Iranian households. Such constraints may manifest as limitations on borrowing amounts or high interest rates, leading individuals to opt for non-borrowing. The examination of financial development reveals a negative and significant relationship between improved financial access and depth and the coefficient of excess sensitivity of consumption. Specifically, a 10% improvement in the average loan amount and loan-to-income ratio (financial depth indicators) results in 12.5% and 13% reductions, respectively, in the coefficient of excess sensitivity of consumption. Additionally, a 10% enhancement in the average number of loans received by households (financial access indicator) leads to an impressive 20.5% reduction in the coefficient of excess sensitivity of consumption.
Discussion and Conclusion
This study challenges the traditional concept of permanent income hypothesis while emphasizing the importance of understanding excess sensitivity of consumption in economic research. Furthermore, it underscores the role of financial development, characterized by improved access to credit and financial services, in diminishing households' vulnerability to income fluctuations. These results hold substantial implications for policymakers and researchers alike, offering insights into addressing income volatility and its effects on household consumption in Iran and similar economies
The conventional notion of the permanent income hypothesis is that individuals aim to smooth their consumption over time, demonstrating resistance to fluctuations in income. This foundational concept assumes that individuals utilize savings or credit when faced with expected income changes or temporary income shocks, preserving their ultimate well-being. However, empirical evidence challenges this hypothesis, revealing that consumers often exhibit responsiveness to income changes, both expected and temporary. This phenomenon is called "excess sensitivity of consumption". Various factors underpin this apparent excess sensitivity of consumption, encompassing demographic dynamics, labor market decisions, reliance on aggregated data, superior information within households, income measurement inaccuracies, and liquidity constraints.
Methodology
This study employs the Panel-IV method to estimate the coefficient of excess sensitivity of consumption. It utilizes two financial development indicators, namely access to financial services and financial depth, to evaluate their impact on this coefficient. The significance of this investigation lies in the Iranian economic history, which witnessed financial development in the late 1990s, followed by a financial downturn. The data are derived from household income and expenditure surveys conducted by the Iranian Statistical Center. The analysis encompasses the years 2004 to 2020. These surveys incorporate data on various aspects of household’s financial information, including the amount and number of loans received and essential details about their employment status.
Due to the cross-sectional nature of the data, it is imperative to use a pseudo-panel approach, providing several advantages. First, it eliminates the individual-specific measurement errors. Second, it mitigates the issues arising from the short time series data, which can lead to estimation errors. Previous research has estimated the coefficient of excess sensitivity of consumption. However, this study contributes by examining the effects of financial development on consumption smoothing in the Iranian economy. Notably, previous research in Iran focused solely on estimating the coefficient of excess sensitivity of consumption without investigating the influence of financial development.
Findings
The findings indicate the excess sensitivity of consumption coefficient is 0.266 for the Iranian households. In practical terms, a 10% expected increase in income results in a 2.66% increase in consumption. This finding indicates liquidity constraints faced by the Iranian households. Such constraints may manifest as limitations on borrowing amounts or high interest rates, leading individuals to opt for non-borrowing. The examination of financial development reveals a negative and significant relationship between improved financial access and depth and the coefficient of excess sensitivity of consumption. Specifically, a 10% improvement in the average loan amount and loan-to-income ratio (financial depth indicators) results in 12.5% and 13% reductions, respectively, in the coefficient of excess sensitivity of consumption. Additionally, a 10% enhancement in the average number of loans received by households (financial access indicator) leads to an impressive 20.5% reduction in the coefficient of excess sensitivity of consumption.
Discussion and Conclusion
This study challenges the traditional concept of permanent income hypothesis while emphasizing the importance of understanding excess sensitivity of consumption in economic research. Furthermore, it underscores the role of financial development, characterized by improved access to credit and financial services, in diminishing households' vulnerability to income fluctuations. These results hold substantial implications for policymakers and researchers alike, offering insights into addressing income volatility and its effects on household consumption in Iran and similar economies
Natural Resource Rent and Financial Development: Testing Financial Resource Curse Hypothesis in Iran
Dr Majid Aghaei, Dr Mahdieh Rezagholizadeh, Dr Mohammad Abdi, Mrs Rawa Mosavi,
Volume 24, Issue 4 (12-2024)
Volume 24, Issue 4 (12-2024)
Abstract
Aim and Introduction:
Based on empirical studies, in addition to the natural resources curse and the negative impact of natural resources income on the economic growth and development in resource-rich countries, some of these countries face various other issues. These issues include political and social problems, high levels of poverty and inequality, low levels of education, economic growth fluctuations, low institutional quality, and political instability (Sachs & Warner, 2001). In this context, one of the challenges in resource-rich countries, especially in developing countries, when compared to countries without natural resources, is the low level of financial development. Financial development has failed to play an effective role in the economic growth of these countries (Albadawi and Soto, 2012; Gelb, 2010; Samargandi et al., 2014; Frenkel, 2012). On the other hand, considering studies such as those by Pendergas et al., (2011), in most resource-rich countries that have managed to overcome the resource curse, a reasonable level of financial development is observed. Therefore, the first question that arises is whether there is a relationship between financial development and the abundance of natural resources in these countries. Given the role of the financial system in the optimal allocation of resources, what impact will the financial system have on the abundance of natural resources in resource-rich countries?
Iran is a country abundant in oil resources that has struggled to overcome the challenges and obstacles on the path to development, such as unemployment and economic growth fluctuations. Issues related to natural resources still persist in this country. Given the importance of the relationship between the financial sector and the abundance of natural resources for necessary policymaking on the path to economic growth and development, this study aims to examine and investigate the relationship between the abundance of natural resources and financial development in Iran using various financial development indicators and different econometric methods.
Methodology:
In order to investigate and empirically analyze the long-term and short-term dynamic relationship between variables, this research employs the Autoregressive Distributed Lag (ARDL) bounding test approach. The ARDL Bounding test method was developed by Pesaran and Shin (1999) and Pesaran et al. (2001). This method offers advantages over other conventional and previous cointegration methods, such as the Johansen and Toda-Yamamoto approaches. Some of its advantages include applicability regardless of considering the order of cointegration between variables, its ability to handle cases where variables are I (0) or I (1), suitability for limited sample sizes, obtaining efficient estimates without the risk of over-specification of the long-run model relationships, and presenting a reduced-form single-equation form rather than a systemic one for the long-run relationship.
The ARDL model estimates the short-term and long-term linear relationship between variables and cannot estimate non-linear relationships between the variables. Therefore, in this study, considering the possibility of a non-linear and asymmetric relationship between resource rents and financial development, the non-linear ARDL model, developed by Shin et al. in 2014, was employed to estimate the model. The NARDL model is a specific form of the ARDL model developed by Pesaran et al., (2001). It allows for the investigation of asymmetry in the long-term and short-term relationships between variables. The advantage of the NARDL method over other cointegration techniques is its superior performance in models with limited observations. Furthermore, this approach is applicable when the explanatory variables in the model are endogenous (Alam and Quazy, 2003).
Findings:
Results indicate that impact of natural resource abundance on the banking development index is not significant in the short term, while the lagged values of natural resources have a positive and significant impact on the banking development index in Iran. Considering the long-term estimation of the model, it can be concluded that the effect of natural resource abundance or, in other words, resource rents on banking sector development in Iran is positive and significant. Based on this result, the hypothesis of resource curse in the banking sector during the examined period in Iran is confirmed. Beck (2011) found that in natural resources rich countries, banks have better capitalization and profitability, but they provide fewer credits to the private sector and have less inclination towards financial development. Therefore, it appears that due to the bank-oriented nature of the financial system in Iran and the substantial injection of oil resources into banks, it has managed to foster the development of this sector.
The results of estimating the stock market development model indicate that natural resource abundance has a positive impact on stock market development in both the short and long terms, although it is not statistically significant. Therefore, it is not possible to make a clear statement about the presence or absence of the resource curse in the stock market. Based on studies like Asif et al. (2020) and Ali et al. (2022), the inclusion of various companies related to natural resources in the stock market can help finance these companies in their high-cost extraction and refining operations. Consequently, it can create various job opportunities and boost economic activities, leading to economic growth and development. Therefore, income derived from natural resources through an efficient stock market can contribute to economic growth.
The impact of natural resource abundance on the overall financial development index in the long term is positive but not statistically significant. Therefore, the hypothesis of the resource curse in Iran is not confirmed. Considering that the Iranian financial system is influenced by the banking system, and resource rents have been confirmed in the banking sector, this result can be justified as indicative of the greater flow of oil revenues into the Iranian banking system. However, this result may also indicate the dominant role of the government in the allocation of natural resource revenues and the weakness of the private sector and the capital market in the proper allocation of these revenues. The results of estimating the overall financial development index, which is obtained by combining stock market development and banking development, highlight the importance of financial integration and the utilization of the entire financial system's capacity to transform resource rents into a resource blessing.Top of Form
Discussion and Conclusion:
Based on the empirical results, the hypothesis of the presence of resource cures in the banking sector in Iran was confirmed, given the significant positive relationship between banking sector development and natural resource abundance during the study period. However, regarding the resource curse in the stock market, it is not possible to make a clear statement due to the insignificance of the coefficients.
According to the estimation of the NARDL model and the significant positive impact of positive shocks from natural resource rents on the banking development index on one hand, and the negative (although insignificant) impact of negative shocks on the other hand, the results of the NARDL model can be seen as confirming the findings of the ARDL model. Therefore, the hypothesis of resource blessing in the banking sector is cautiously confirmed based on this model.
In the case of the stock market, the NARDL results also do not provide conclusive evidence regarding the hypothesis of a resource curse in Iran's stock market due to the insignificance of the coefficients related to resource rents in the estimation of the stock market development index.
The results of the NARDL estimation in the overall financial development index model indicate that positive shocks from resource rents have a significant positive impact on the overall financial development, while negative shocks have a negative impact, although they are not statistically significant. Considering these results, the dominant role of the banking system in Iran's financial system is confirmed, and thus, special attention from the government to the capital market as one of the most effective components of the financial system seems necessary.Top of Form
Based on empirical studies, in addition to the natural resources curse and the negative impact of natural resources income on the economic growth and development in resource-rich countries, some of these countries face various other issues. These issues include political and social problems, high levels of poverty and inequality, low levels of education, economic growth fluctuations, low institutional quality, and political instability (Sachs & Warner, 2001). In this context, one of the challenges in resource-rich countries, especially in developing countries, when compared to countries without natural resources, is the low level of financial development. Financial development has failed to play an effective role in the economic growth of these countries (Albadawi and Soto, 2012; Gelb, 2010; Samargandi et al., 2014; Frenkel, 2012). On the other hand, considering studies such as those by Pendergas et al., (2011), in most resource-rich countries that have managed to overcome the resource curse, a reasonable level of financial development is observed. Therefore, the first question that arises is whether there is a relationship between financial development and the abundance of natural resources in these countries. Given the role of the financial system in the optimal allocation of resources, what impact will the financial system have on the abundance of natural resources in resource-rich countries?
Iran is a country abundant in oil resources that has struggled to overcome the challenges and obstacles on the path to development, such as unemployment and economic growth fluctuations. Issues related to natural resources still persist in this country. Given the importance of the relationship between the financial sector and the abundance of natural resources for necessary policymaking on the path to economic growth and development, this study aims to examine and investigate the relationship between the abundance of natural resources and financial development in Iran using various financial development indicators and different econometric methods.
Methodology:
In order to investigate and empirically analyze the long-term and short-term dynamic relationship between variables, this research employs the Autoregressive Distributed Lag (ARDL) bounding test approach. The ARDL Bounding test method was developed by Pesaran and Shin (1999) and Pesaran et al. (2001). This method offers advantages over other conventional and previous cointegration methods, such as the Johansen and Toda-Yamamoto approaches. Some of its advantages include applicability regardless of considering the order of cointegration between variables, its ability to handle cases where variables are I (0) or I (1), suitability for limited sample sizes, obtaining efficient estimates without the risk of over-specification of the long-run model relationships, and presenting a reduced-form single-equation form rather than a systemic one for the long-run relationship.
The ARDL model estimates the short-term and long-term linear relationship between variables and cannot estimate non-linear relationships between the variables. Therefore, in this study, considering the possibility of a non-linear and asymmetric relationship between resource rents and financial development, the non-linear ARDL model, developed by Shin et al. in 2014, was employed to estimate the model. The NARDL model is a specific form of the ARDL model developed by Pesaran et al., (2001). It allows for the investigation of asymmetry in the long-term and short-term relationships between variables. The advantage of the NARDL method over other cointegration techniques is its superior performance in models with limited observations. Furthermore, this approach is applicable when the explanatory variables in the model are endogenous (Alam and Quazy, 2003).
Findings:
Results indicate that impact of natural resource abundance on the banking development index is not significant in the short term, while the lagged values of natural resources have a positive and significant impact on the banking development index in Iran. Considering the long-term estimation of the model, it can be concluded that the effect of natural resource abundance or, in other words, resource rents on banking sector development in Iran is positive and significant. Based on this result, the hypothesis of resource curse in the banking sector during the examined period in Iran is confirmed. Beck (2011) found that in natural resources rich countries, banks have better capitalization and profitability, but they provide fewer credits to the private sector and have less inclination towards financial development. Therefore, it appears that due to the bank-oriented nature of the financial system in Iran and the substantial injection of oil resources into banks, it has managed to foster the development of this sector.
The results of estimating the stock market development model indicate that natural resource abundance has a positive impact on stock market development in both the short and long terms, although it is not statistically significant. Therefore, it is not possible to make a clear statement about the presence or absence of the resource curse in the stock market. Based on studies like Asif et al. (2020) and Ali et al. (2022), the inclusion of various companies related to natural resources in the stock market can help finance these companies in their high-cost extraction and refining operations. Consequently, it can create various job opportunities and boost economic activities, leading to economic growth and development. Therefore, income derived from natural resources through an efficient stock market can contribute to economic growth.
The impact of natural resource abundance on the overall financial development index in the long term is positive but not statistically significant. Therefore, the hypothesis of the resource curse in Iran is not confirmed. Considering that the Iranian financial system is influenced by the banking system, and resource rents have been confirmed in the banking sector, this result can be justified as indicative of the greater flow of oil revenues into the Iranian banking system. However, this result may also indicate the dominant role of the government in the allocation of natural resource revenues and the weakness of the private sector and the capital market in the proper allocation of these revenues. The results of estimating the overall financial development index, which is obtained by combining stock market development and banking development, highlight the importance of financial integration and the utilization of the entire financial system's capacity to transform resource rents into a resource blessing.Top of Form
Discussion and Conclusion:
Based on the empirical results, the hypothesis of the presence of resource cures in the banking sector in Iran was confirmed, given the significant positive relationship between banking sector development and natural resource abundance during the study period. However, regarding the resource curse in the stock market, it is not possible to make a clear statement due to the insignificance of the coefficients.
According to the estimation of the NARDL model and the significant positive impact of positive shocks from natural resource rents on the banking development index on one hand, and the negative (although insignificant) impact of negative shocks on the other hand, the results of the NARDL model can be seen as confirming the findings of the ARDL model. Therefore, the hypothesis of resource blessing in the banking sector is cautiously confirmed based on this model.
In the case of the stock market, the NARDL results also do not provide conclusive evidence regarding the hypothesis of a resource curse in Iran's stock market due to the insignificance of the coefficients related to resource rents in the estimation of the stock market development index.
The results of the NARDL estimation in the overall financial development index model indicate that positive shocks from resource rents have a significant positive impact on the overall financial development, while negative shocks have a negative impact, although they are not statistically significant. Considering these results, the dominant role of the banking system in Iran's financial system is confirmed, and thus, special attention from the government to the capital market as one of the most effective components of the financial system seems necessary.Top of Form
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