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

Author

Listed:
  • Khodadadi, Farideh

    (Ph.D. Candidate in Economics, Shahid Beheshti University)

  • Samsami, Hossein

    (Assistant Professor of Economics, Shahid Beheshti University)

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

Suggested Citation

  • Khodadadi, Farideh & Samsami, Hossein, 2022. "Evaluating the Effectiveness of Indirect Monetary Policy Instruments under Fractional Reserve Banking: the DSGE Approach," Quarterly Journal of Applied Theories of Economics, Faculty of Economics, Management and Business, University of Tabriz, vol. 9(2), pages 89-122, September.
    • Handle: RePEc:ris:qjatoe:0269
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    More about this item

    Keywords

    Legal Reserve; Open Market Operations; Economic Stability; Financial Stability; Stochastic Dynamic General Equilibrium (DSGE);
    All these keywords.

    JEL classification:

    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • G01 - Financial Economics - - General - - - Financial Crises

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