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

Authors

1 Department of Economics, Qazvin Branch, Islamic Azad University, Ghazvin, Iran.

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

Abstract

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his 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 Iranian economy. Furthermore, credit shocks in the banking system 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 the lending rate. The nominal deposit rate and financial leverage reduce by this shock and, as expected, the return equity capital rate reduces too.
 

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