Assessment of Financial Stability in the Banking Sector in Iran

Kamran Nadri (), Sajad Ebrahimi () and Abbas Fadaie ()
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Kamran Nadri : Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran
Sajad Ebrahimi : Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran
Abbas Fadaie : Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran

Journal of Money and Economy, 2018, vol. 13, issue 4, 501-523

Abstract: The aims of the present study are developing a financial stability index (FSI) using banking indices to measure financial stability in Iran, and examining the relationship between financial stability and macroeconomic variables for policymaking. To these ends, we have employed principal-component analysis, out of sample forecasting, Autoregressive Integrated Moving Average (ARIMA) method, and Vector Error Correction Model (VECM). The monthly data period is spanning 2007:3 through 2017:2. We find evidence of one cointegrating vector. According to the cointegration test, there is a long-run relationship running from inflation, Gross Domestic Product (GDP) growth rate, and unemployment to FSI. Also, the results of the Engle-Granger test indicate bidirectional causality between FSI and unemployment. Forecast evaluation shows that VECM-based FSI prediction is more accurate than the ARIMA model.

Keywords: Financial Stability Index; Principal-Component Analysis; Out of Sample Forecasting; ARIMA; VECM; Macroeconomic Variables (search for similar items in EconPapers)
JEL-codes: B22 C53 G17 G21 (search for similar items in EconPapers)
Date: 2018
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