Monetary Policy and Its Effect on Economic Growth: With Emphasis on the Banking Interest (Profit) Rate in Iran

In the recent economic literature, an important finding is the causal relationship between financial development and economic growth. Before the 1970s, the most of economists believed that economic growth could be reached only by accumulation of physical capital. In the 1970s and after the pioneering works of McKinon (1973) and Shaw (1973), this orthodox view was criticized by a vast amount of new theoretical and empirical researches. Regarding the importance of this issue and the fact that our country is highly involved in repressive financial and monetary policies, this paper investigates the effects of these policies on economic growth and development. Therefore, an indirect method is employed that estimates two sets of cointegration equations containing financial depth and GDP. The main finding of this paper is that financial repression impresses the economic growth through the negative effect on financial depth.