The Effects of Monetary Policy on Macroeconomic Variables through Credit and Balance Sheet Channels: A Dynamic Stochastic General Equilibrium Approach

Pejman Peykani (), Mostafa Sargolzaei, Amir Takaloo and Shahla Valizadeh
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Pejman Peykani: School of Industrial Engineering, Iran University of Science and Technology, Tehran 1684613114, Iran
Mostafa Sargolzaei: Department of Finance and Banking, Faculty of Management and Accounting, Allameh Tabataba’i University, Tehran 1489684511, Iran
Amir Takaloo: Department of Finance and Banking, Faculty of Management and Accounting, Allameh Tabataba’i University, Tehran 1489684511, Iran
Shahla Valizadeh: Department of Finance and Banking, Faculty of Management and Accounting, Allameh Tabataba’i University, Tehran 1489684511, Iran

Sustainability, 2023, vol. 15, issue 5, 1-21

Abstract: Economic policies aimed at managing economic variables in the short and long term have always been of special importance. These policies seek to reduce economic fluctuations in the short term and increase sustainable economic growth in the long term. One of these policies is monetary policy, which is mainly carried out by central banks worldwide. This paper uses the Keynesian Dynamic Stochastic General Equilibrium (DSGE) model to examine the effects of monetary policy on the real variables of the Iranian economy through the credit channel and the balance sheet channel. The presented model analyzed information about macroeconomic variables in Iran for the period from 1990 to 2020. The obtained results show that with the implementation of restrictive monetary policy in the economy, all productive activities of enterprises decreased, and this led to a decrease in household income, which in turn reduced household savings in the form of bank deposits. Because the most important sources of financing for banks are deposits, the ability of banks to offer loans was reduced. On the other hand, a restrictive monetary shock was associated with a decline in the value of corporate securities. As a result, the amount of received loans by firms was reduced by the value of the assets. This reduced the demand of banks for bank loans, which intensified the effects of the initial shock, along with a reduction in the banks’ ability to provide lending services. Further, the results indicate the relative success of the model in simulating Iran’s macro economy.

Keywords: sustainable economic growth; Dynamic Stochastic General Equilibrium (DSGE) model; credit channel; balance sheet channel; restrictive monetary policy; monetary transmission mechanism (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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