حسین درودیان

Iran’s economy has encountered significant challenges in recent years, with the government debt to contractors emerging as one of the most urgent issues. This situation has negatively impacted Iran’s monetary and banking system, leading to several adverse consequences such as increased funding costs for banks, higher loan interest rates, excessive money supply, and a reduced capacity for banks to provide loans. A proposed solution is based on credit easing and endogenous money, which involves settling the government debt to contractors by making adjustments on the asset side of the Central Bank’s balance sheet. However, the practical implementation of this policy depends on the use of Central Bank resources, which raises concerns about a sudden increase in the money supply and potential negative effects on other economic variables, especially inflation. This uncertainty has led to doubts about the feasibility of such a strategy. The present research aimed to examine the fundamental principles and prerequisites for adopting a credit easing policy in Iran. The study also used stock-flow consistent models to evaluate the potential outcomes of implementation of the policy. The findings indicate that settling the government debt to banks by using the Central Bank resources results in an expansion of the monetary base and money supply, an increase in real GDP, and a reduction in both inflation and interest rates compared to the baseline scenario.

The government's indebtedness to banks stands as one of Iran's most pressing issues within its monetary and banking system. This predicament has precipitated several adverse consequences, including the cost of funds for banks, elevated interest rates on loans, an unrestrained surge in the money supply, and a diminishing capacity for banks to extend loans. To tackle this challenge, some economists with emphasis on endogenous nature of money, propose a remedy grounded in credit easing. this approach entails settling the government's debt to banks by effecting adjustments on the asset side of the Central Bank's balance sheet. However, the practical execution of this policy hinges on the utilization of Central Bank resources, raising concerns about a sudden surge in money supply and potential adverse impacts on other economic variables, notably inflation. This has cast doubt on the feasibility of implementing such a strategy. In this research, we delved into the fundamental principles and prerequisites of adopting the credit easing policy in Iran. To evaluate the potential outcomes of implementing this policy, we employ the stock flow consistent model. Our findings reveal that settling the government's debt to banks through the utilization of Central Bank resources leads to an expansion in the monetary base, a reduction in money supply, an upswing in real GDP, and a decrease in both inflation and interest rates when juxtaposed with the baseline scenario.