Examining the Asymmetric Effects of Economic Policy Uncertainty on the Efficiency of Iran’s Financial System: An NARDL Approach

AbdolMohammad Kashian, Mahnaz Khorasani and Seyed Kazem Ebrahimi
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AbdolMohammad Kashian: Associate Prof., Department of Economics, Faculty of Economics, Management and Administrative Sciences, Semnan University, Semnan, Iran
Mahnaz Khorasani: Ph.D. Candidate in Finance - Financial Engineering, Faculty of Economics, Management and Administrative Sciences, Semnan University, Semnan, Iran
Seyed Kazem Ebrahimi: Associate Prof., Department of Accounting, Faculty of Economics, Management and Administrative Sciences, Semnan University, Semnan, Iran

Quarterly Journal of Applied Theories of Economics, 2025, vol. 12, issue 3, 129-164

Abstract: Economic uncertainty, as an exogenous and volatile variable, is recognized as a key factor potentially undermining the efficiency of financial systems. In developing economies such as Iran, which are characterized by fragile institutional structures and high sensitivity to policy shocks, this phenomenon can significantly affect financial system performance and efficiency by creating instability in macroeconomic indicators and reducing market participants’ confidence. Since the financial system’s response to positive and negative shocks of economic uncertainty is not necessarily symmetrical, examining its asymmetric effects is particularly important, as this approach provides a more accurate understanding of the transmission mechanisms of uncertainty and its consequences. Accordingly, this study analyzes the asymmetric effects of economic uncertainty on the efficiency of Iran’s financial system using quarterly data from 1997 to 2023. The innovation of this study lies in the application of a nonlinear and asymmetric framework based on the Nonlinear Autoregressive Distributed Lag (NARDL) model, which allows for the separation and comparison of the effects of positive and negative shocks. In the first step, the economic uncertainty index was estimated using macroeconomic variables through a combination of the Generalized Autoregressive Conditional Heteroskedasticity (GARCH) model and Principal Component Analysis (PCA). Subsequently, the statistical properties of the data—including stationarity, nonlinear dependence, cointegration, and the asymmetry of shocks—were examined, confirming the suitability of the NARDL model. The findings indicate that, in both the short and long term, negative economic uncertainty shocks improve financial system efficiency, whereas positive shocks weaken it. Moreover, variables such as foreign direct investment, education level, and trade volume have positive and significant effects on the efficiency of the financial system.

Keywords: Economic uncertainty; financial system efficiency; asymmetric effects; Nonlinear Autoregressive Distributed Lag model; Iranian economy (search for similar items in EconPapers)
JEL-codes: C22 E44 E61 G28 O16 (search for similar items in EconPapers)
Date: 2025
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https://ecoj.tabrizu.ac.ir/article_20361_3648c7843afc4a9a71497f5f59d31c27.pdf

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Persistent link: https://EconPapers.repec.org/RePEc:ris:qjatoe:023029

DOI: 10.22034/ecoj.2025.67512.3435

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