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Macroeconomic Effects of Government Debt to Banks in Iran

Soheil Roudari () and Yunes Salmani ()
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Soheil Roudari: Faculty of Economics and Administrative Sciences, Ferdowsi University of Mashhad
Yunes Salmani: Management and Economics Faculty, Tarbiat Modares University

Journal of Money and Economy, 2020, vol. 15, issue 4, 403-422

Abstract: In the Iranian economy, part of the government's fiscal policies and liabilities is always financed by banks. As government debt to banks increases, the private sector's access to loans and facilities is limited. It can cause undesirable macroeconomic outcomes. This study investigates the macroeconomic effects of government debt on banks in Iran over 1972–2016 by using an SVAR model. Results show that government debt to banks does not significantly affect the aggregate demand ratio to aggregate supply and GDP per labor. Still, it significantly increases the real exchange rate and decreases the non-tradable goods' ratio to tradable goods prices. In the long-run, the real exchange rate, the ratio of non-tradable goods to tradable goods price, and the general price level changed by 34.46, 20.95, and 46.4 percent, respectively, which can be explained by the government debt to banks. Results indicate that the government policy manages the Iranian economy.

Keywords: Banks; Government Debt; Real Exchange rate; Tradable Goods; Non-Tradable Goods; SVAR (search for similar items in EconPapers)
JEL-codes: E62 E69 H63 H69 (search for similar items in EconPapers)
Date: 2020
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Handle: RePEc:mbr:jmonec:v:15:y:2020:i:4:p:403-422