monetary condition index

Monetary policy transmission through changes in bank facilities is known as one of the key channels of influence of monetary policy. The strength of this channel of monetary policy transmission is highly dependent on economic conditions. The level of relying on the market mechanism in the banking industry is one of the variables that influence the transmission of monetary policy through lending channel that is called banking marketization. The aim of this paper is to analyze the hypothesis that the bank lending channel of monetary policy shocks imposed by monetary authorities is influenced by marketization in the banking system or not? To answer this question have been used two indexes for banking marketization. The ratio of the deposits of non-state-owned banks to the total deposits of all sample banks is the first index and the proportion of loans to non-state-owned enterprises in the total loans of sample banks is the second index. Also multiplication between marketization index and monetary condition index has been regarded to study the effect of increase in banking marketization on monetary policy transmission. Generalized Method of Moments or GMM method is used to estimate the model, and the data of balance sheet of 26 banks in the banking network from 2001 to 2012 has been used. The results show that as expected, with increase the degree of marketization in banking network, the banking network facilities is increased. In addition, banking marketization will weaken the transmission of monetary policy through bank lending.

This paper presents the main deficirncies of monetary policy in Iran. Financial repression is used by monetary authorities. Therefore official interest rate could not be the main channel to affect the real sector. Also the monetary condition Index and the other well know monetary rules are not used to evaluate monetary conditions. Moreover monetary policy instruments are traditional ones and recent development of monetary instruments are disregarded. Fiscal policy leads monetary policy because of oil revenuees. In case of decrease in oil revenues, budget deficit is monetized. By the help of a found the monetary policy in Iran does not take into account the economic condition in particular, inflation and GDP gaps.