Evaluating the Effectiveness of Indirect Monetary Policy Instruments under Fractional Reserve Banking: the DSGE Approach

Farideh Khodadadi () and Hossein Samsami ()
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Farideh Khodadadi: Ph.D. Candidate in Economics, Shahid Beheshti University
Hossein Samsami: Assistant Professor of Economics, Shahid Beheshti University

Quarterly Journal of Applied Theories of Economics, 2022, vol. 9, issue 2, 89-122

Abstract: The purpose of this study is to investigate the effectiveness of indirect monetary policy instruments such as legal reserve and open market operations (repurchase agreement) on financial and economic stability of Iran under two different scenarios. For this purpose, a stochastic dynamic general equilibrium model have been designed in view of the realities of the Iranian economy. After determining the input values ofthe model and estimating the parameters by using quarterly data of Iran's economy during the period of 1991-2020 by the Bayesian estimation method, the results of model variables simulation indicate the validity of the model in describing the fluctuations of the Iran's economy. Examining the dynamics of the model shows that both of the decreasing the ratio of legal deposits momentum and the repurchase of bonds reduce inflation, but the output boom through the multiplier channel is relatively higher than the monetary base. In addition, the final result of reducing the legal reserve ratio over the most real and financial sector variables is longer and larger than the repurchase agreement policy. This makes it even more important to pay more attention to how the legal reserve ratio is determined in the country

Keywords: Legal Reserve; Open Market Operations; Economic Stability; Financial Stability; Stochastic Dynamic General Equilibrium (DSGE) (search for similar items in EconPapers)
JEL-codes: E27 E42 E51 G01 (search for similar items in EconPapers)
Date: 2022
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