The Effect of Macroprudential Policies on Financial Stability of Iran Economy: DSGE Approach (in Persian)

Hassan Dargahi () and Mehdi Hadian ()
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Hassan Dargahi: Faculty of Economics and Political Sciences, Shahid Beheshti
Mehdi Hadian: Faculty of Economics and Political Sciences, Shahid Beheshti

Journal of Monetary and Banking Research (فصلنامه پژوهش‌های پولی-بانکی), 2018, vol. 10, issue 34, 590-559

Abstract: After the 2008 Financial Crisis, the application of macroprudential policies has expanded to ensure financial stability. Given that the financial stability in Iran’s economy is vulnerable to the banking system, the aim of this study is to investigate the role of macroprudential policies in the financial stability of Iran’s economy. Therefore, based on DSGE approach, a model incorporating the banking system, considering NPLs and Frozen Assets, has been constructed. The results of simulations based on quarterly data of Iran economy during 1990-2014 show that the adoption of macroprudential instruments, such as Loan-to-Value ratio and countercyclical capital buffer, is able to contain the procyclicality of the financial sector which leads to declining vulnerabilities and instability of the financial sector. Moreover, due to the interaction between the real and the financial sector, reducing financial instability improves macroeconomic performance and increases social welfare. Therefore, we suggest that in order to decline the instability of the financial sector and prevent its adverse effect on the real sector, a financial supervisor should be institutionalized to implement macroprudential policies.

JEL-codes: D53 E44 E47 G21 G28 (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:mbr:jmbres:v:10:y:2018:i:34:p:590-559

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