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Assessment of Financial Stability in the Banking Sector in Iran

Author

Listed:
  • Nadri , Kamran

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

  • Ebrahimi , Sajad

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

  • Fadaie , Abbas

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

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.

Suggested Citation

  • Nadri , Kamran & Ebrahimi , Sajad & Fadaie , Abbas, 2018. "Assessment of Financial Stability in the Banking Sector in Iran," Journal of Money and Economy, Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran, vol. 13(4), pages 501-523, October.
    • Handle: RePEc:mbr:jmonec:v:13:y:2018:i:4:p:501-523
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    References listed on IDEAS

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    More about this item

    Keywords

    Financial Stability Index; Principal-Component Analysis; Out of Sample Forecasting; ARIMA; VECM; Macroeconomic Variables;
    All these keywords.

    JEL classification:

    • B22 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Macroeconomics
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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