The Role of Banks in the Effect of Monetary Policies on Macroeconomic Variables in the Dynamic Stochastic General Equilibrium (DSGE) Model

Document Type : Research Paper

Author

, Department of finance and banking, School of Management and Accounting, Allameh Tabataba’i University

Abstract

Subject and Purpose of the Article: One of the factors of risk growth in banks is incorrect expansionary monetary policy, which leads to adverse effects on economic activities and price levels. In this research, an attempt has been made to investigate the role of banks in influencing monetary policies on macroeconomic variables in the Iranian economy.
Research Method: To achieve this goal and investigate the effect of monetary policy on real variables and price levels in Iran's economy, the Dynamic Stochastic General Equilibrium (DSGE) model and banking system information have been used. The model examined in this article has four sectors: households, economic enterprises (which include intermediate goods producers, consumer and capital final goods producers, and trust companies), banks and monetary authorities (central bank and government).
Research Finding: The results show that the expansionary monetary policy shock has caused production, inflation, private sector consumption, investment, net worth in the economy and lending to increase. Another result obtained from the investigated model shows that the credit shock and the increase in the lending power of the banks cause an increase in production, private sector consumption, investment, net worth and total loans and decrease the level of inflation. Finally, when a shock occurs due to an increase in inflation and a decrease in consumption and investment, this shock causes an increase in the volume of loans, while the level of production remains almost constant.

Keywords

References

Adams, R. & Amel, D. (2005). The Effects of Local Banking Market Structure on the Bank-Lending Channel of Monetary Policy. Division of Research and Statistics, Board of Governors of the Federal Reserve System.
Adrian, T. & Shin, H. (2009). Financial intermediaries and monetary economics. Federal Reserve Bank of New York Staff Reports, no 398.
Adrian, T. & Shin, H. (2009). Money, Liquidity, and Monetary Policy. American Economic Review, Vol. 99, No. 2, pp. 600-605.
Adrian, T. & Shin, H. (2009). Financial Intermediation and Monetary Economics. Federal Reserve Bank of New York Staff Reports, No. 398.
Adrian & Shin, (2010). Federal Reserve Bank of New York Staff Reports the Changing Nature of Financial Intermediation and the Financial Crisis of 2007-09. Federal Reserve Bank of New York Staff Reports, no. 439
Angeloni, I; Faia, E. & Lo Duca, M. (2010). Monetary Policy and Risk Taking (January 1, 2013). SAFE Working Paper No. 8. Available at SSRN: http://ssrn.com/abstract=2230335 or http://dx.doi.org/10.2139/ssrn.2230335.
Bernanke, B. & Blinder, A. (1992). The Federal Funds Rate and the Channels of Monetary Transmission. American Economic Review, 82(4), 901-921.
Borio, C. & Zhu, H. (2008). Capital regulation, risk-taking and monetary policy: a missing link in the transmission mechanism? BIS Working Papers, No. 268.
Boyd, John H. & Prescott, Edward C. (1986). Financial intermediary-coalitions. Journal of Economic Theory, Elsevier, Vol. 38(2), Pages 211-232.
Brázdik, F; M. Hlaváček, & A. Maršál (2011). Survey of Research on Financial Sector Modeling Within DSGE Models: What Central Banks Can Learn from It. Czech National Bank Research and Policy, Note3/2011.
Bruno, V. & Shin, H. (2012). Capital Flows, Cross-Border Banking and Global Liquidity. Working paper, Princeton University.
Cetorelli, N. & Goldberg, L. (2012). Banking Globalization and Monetary Transmission. Journal of Finance, 67(5), 1811-1843
Chari, V.V; Christiano, L.J. & Eichenbaum, M. (1995). Inside Money, Outside Money and Short Term Interest Rates. Journal of Money, Credit and Banking, 27, 1354-86.
Christiano, L; Motto, R. & Rostagno, M. (2003). The Great Depression and the Friedman-Schwartz Hypothesis. Journal of Money, Credit and Banking, 35, No. 6, 1119-1198.
Christiano, L; Motto, R. & Rostagno, M. (2007). Shocks, Structures or Policies? The Euro Area and the US After 2001. Journal of Economic Dynamics and Control, Vol. 32(8), 2476-2506, pp. 217-235.
Christiano, L; Rostagno, M. & Motto, R. (2010). Financial factors in economic fluctuations. Working Paper Series 1192, European Central Bank.
De Groot, O. (2013). Computing the risky steady state of DSGE models. Economics Letters 120(3), 566 -569.
De Graeve, F; Kick, T. & Koetter, M. (2008). Monetary policy and financial (in) stability: An integrated micro–macro approach. Journal of Financial Stability, 4 (2008) 205–231
Diamond, D. & Rajan, R. (2009). Illiquidity and interest rate policy. NBER Working Paper Series, No 15197.
Diamond, D. & Rajan, R. (2000). Banks, Short Term Debt and Financial Crises: Theory, Policy Implications and Applications. NBER Working Papers 7764, National Bureau of Economic Research, Inc.
Drucker, S. & Puri, M. (2009). On loan sales, loan contracting and lending relationships. Review of Financial Studies, Vol 22, pp 2835–72.
Badarau, F. & Popescu, A. (2012). Monetary Policy and Credit Cycles: A DSGE Analysis. Working Papers halshs-00828074, HAL.
Gunji, H. & Yuan, Y. (2010). Bank profitability and the bank lending channel: Evidence from China. Journal of Asian Economics, 21, 129-141.
Gunji, H. & Yuan, Y. (2009). Bank profitability and the bank lending channel: Evidence from China. Journal of Asian Economics, 21, 129–141.
Peykani, P; Sargolzaei, M.; Takaloo, A.; Sanadgol, N. & Kamyabfar, H. (2023). The application of structural and machine learning models to predict the default risk of listed companies in the Iranian capital market. Plos one, Volume 18, Issue 11, Pages e0292081.
Iacoviello, M. & Minetti, R. (2008). The credit channel of monetary policy: Evidence from the housing market. Journal of Macroeconomics, 30, 69-96.
Angeloni, I; Faia, E. & Winkler, R. (2011). Debt Consolidation and Financial Stability. Revue économique, Presses de Sciences-Po, Vol. 62(6), pages 1067-1079.
Angeloni, I. (2010). Monetary Policy and Risk Taking. Working Papers 380, Bruegel.
Lown, C. & Donald, P. (2006). The Credit Cycle and the Business Cycle: New Findings Using the Loan Officer Opinion Survey. Journal of Money, Credit and Banking, Blackwell Publishing, Vol. 38(6), pages 1575-1597.
Sargolzaei, M.; Takaloo, A. & Seyedian, S.M. (2023). The effect of stock market liquidity on the market power of banks. The Journal of Economic Policy, Volume 14, Issue 28, Pages 315-344.
Matousek, S. & Sarantis, N. (2009). The bank lending channel and monetary transmission in Central and Eastern European countries. Journal of Comparative Economics, 37, 321-334.
Rajan, R. (2005). Has financial development made the world riskier? National Bureau of Economic Research Working Paper Series, No. 11728.
Peykani, P; Sargolzaei, M.; Takaloo, A. & Valizadeh, S. (2023). The Effects of Monetary Policy on Macroeconomic Variables through Credit and Balance Sheet Channels: A Dynamic Stochastic General Equilibrium Approach. Sustainability, 15(5), 4409; https://doi.org/10.3390/su15054409.
Ozili, P. (2023). Impact of Monetary Policy on Financial Inclusion in Emerging Markets. J. Risk Financial Manag; 16(7), 303; https://doi.org/10.3390/jrfm16070303.
Jermann, U. & Quadrini, V. (2009). Macroeconomic Effects of Financial Shocks. NBER Working Papers 15338, National Bureau of Economic Research, Inc.
Walsh (2010). Monetary Theory and Policy, 3rd edition, MIT Press. ISBN 0-262-01377-0.
Bruno, V. & Shin, H. (2013). Capital Flows, Cross-Border Banking and Global Liquidity, NBER Working Paper, No. 19038.
Peykani, P.; Sargolzaei, M.; Botshekan, M.H.; Oprean-Stan, C. & Takaloo, A. (2023). Optimization of Asset and Liability Management of Banks with Minimum Possible Changes. Mathematics, 11(12), 2761; https://doi.org/10.3390/math11122761.
 

Files

History

  • Receive Date: 15 March 2024
  • Revise Date: 28 March 2024
  • Accept Date: 02 April 2024

Share

How to cite

Statistics