A Study of the Financial Instability and Banking Intermediaries by Using a DSGE Modeling Approach

Authors

1 Faculty of Economics, University of Ghazvin, Ghazvin, Iran

2 Faculty of Economics, University of Allameh Tabataba'i, Tehran, Iran.

Abstract

This paper is to develop a quantitative monetary DSGE model with financial intermediaries, and deals with the endogenously determined balance sheet constraints. Moreover, the present paper studies a DSGE model with financial intermediation as in Gertler and Karadi (2011), a monopolistically competitive banking sector to investigate the role of banks in the propagation of disturbances, and to assess the importance of shocks to the banking sector and to the financial system in explaining economic fluctuations in Iran. The model is estimated using Bayesian techniques. According to the findings, the banking sector attenuates the effects of demand shocks (i.e. monetary policy shock), strengthens the effects of supply shocks (i.e. technology shock) at the national level, and amplifies the transmission of shocks in Iran. Furthermore, shocks in the banking system (credit shocks) and financial shocks are the important sources of macroeconomic fluctuations in Iran. Results show that financial shock is more important in explaining the variation in lending rate. Nominal deposit rate and financial leverage reduce by this shock and, as expected, return equity capital rate reduces.
 

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