The impact of credit shocks on dynamics of financial and macroeconomic variables using a DSGE model for the Iran economy

This paper investigates the effect of deposit rate and loan interest rate shocks as credit shocks on real sector variables and on the optimal investment decisions for household in various assets such as stocks, gold, foreign currency, deposit and real estate. For this purpose, a Dynamic Stochastic General Equilibrium model is used that including New Keynesian economics with financial and banking sector and the model is applied to Iran's economy. Based on the log-linearized form of equations of the designed model, the level of household investment in each of physical and financial assets depends on current asset price negatively and depends on asset price expectation positively. In fact, an investor sales his assets when the current prices increase and keep assets in his portfolio if there is a clear prospect of increasing trend of asset's prices in the future. On the other hand, calibration, simulation and impulse responses functions analysis show that the deposit interest rate positive shock has a negative impact on household investment demand in physical and financial assets. This shock has a positive effect on marginal cost and negative effects on capital stock, investment, output, inflation and consumption from financing cost channel. Based on the results, for stabilization in physical and financial asset markets, forming the positive expectations in the future of asset's price is required. Although an increase in the deposit interest rate is an important tool for monetary and financial policy, and it is a fundamentally necessity in inflationary states, but its negative outcomes should be considered.