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The Role of Unbalanced Balance Sheet of Banking System in Creating the Puzzle of Interest Rate, Inflation and Liquidity Growth: Evidence from Iran

Author

Listed:
  • Badri, Ahmad

    (Shahid Beheshti University, Tehran, Iran
    Monetary and Banking Research Institute (MBRI), Central Bank of the Islamic Republic of Iran (CBI), Tehran, Iran)

  • Zamanzadeh, Hamid

    (Monetary and Banking Research Institute (MBRI), Central Bank of the Islamic Republic of Iran (CBI), Tehran, Iran)

Abstract

The analysis of macroeconomic variables for current situation in Iran indicates a Conundrum. Solving this puzzle is vital for Central Bank of Iran in order to choose an appropriate approach for monetary policy and banking supervision. Increase in liquidity growth rate, significant decrease of inflation rate and interest rate rigidity are the three sides of this puzzle. This study designs an innovative model for connecting the microeconomy of banks with macroeconomy, indicating a solution for mentioned puzzle. Accumulation of fictitious and frozen assets in the assets side of banking system balance sheet makes an unsound flow of liquidity which is partly impacted by fictitious assets of banking system and it is called unsound Liquidity. This situation shows the reality that is financially and economically unbalanced balance sheet of banking system and if these balance sheets seem balanced, is just because deployment of false accounting methods. In fact, quality of liquidity is impacted by reduction of the quality of banking system assets and despite high liquidity growth, this lead to reduction of inflation rate and also caused banks to resist against the reduction of interest rate. The adjusted long run equation of quantity theory of money has estimated in a vector error correction model (1996-2016). The results confirm the direct effect of quality of liquidity on inflation.

Suggested Citation

  • Badri, Ahmad & Zamanzadeh, Hamid, 2016. "The Role of Unbalanced Balance Sheet of Banking System in Creating the Puzzle of Interest Rate, Inflation and Liquidity Growth: Evidence from Iran," Journal of Money and Economy, Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran, vol. 11(2), pages 173-191, April.
    • Handle: RePEc:mbr:jmonec:v:11:y:2016:i:2:p:173-191
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    References listed on IDEAS

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    More about this item

    Keywords

    Unbalanced Balance Sheet; Liquidity; Interest Rate; Inflation and Accounting;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • M4 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting

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