Short-run and Long-run Effects of Financial Intermediation on Economic Growth

Alireza Sharif Moghaddasi () and Yeganeh Mousavi Jahromi ()
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Alireza Sharif Moghaddasi : Faculty of Economics, Payam-e-Noor University
Yeganeh Mousavi Jahromi : Faculty of Economics, Payam-e-Noor University

Journal of Money and Economy, 2017, vol. 12, issue 1, 89-105

Abstract: Financial intermediation in Iran's banking system is negatively affected at least in two ways. First, there are many similarities between financial intermediation and usurious activities in the common interpretation of interest-free banking law. This encourages the banks to participate in various commercial activities. Second, the price setting policies of the central bank makes investment more attractive compared to financial intermediation. In this research, the ratio of interest margin to gross income is selected as an index of financial intermediation and its importance in increasing the short-run and long-run economic growth is investigated using a dynamic linear regression model. Annual data is used and the sample includes 2005 to 2015. Using a methodology similar to Leamer (1983), a large set of control variables is chosen. The main statistical hypothesis is that financial intermediation has negative effect on economic growth. The results show that the rate of rejection of this hypothesis increases as we move from short-run to long-run regressions. In other words, the positive effect of financial intermediation on growth is a long-run phenomenon.

Keywords: Interest Margin; Indicators of Bank Soundness; Interest-Free Banking Law; Leamer’s Methodology (search for similar items in EconPapers)
JEL-codes: C52 E58 G21 (search for similar items in EconPapers)
Date: 2017
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