Balance Sheet Effects of Monetary Policy on Banking System and Macroeconomic Variables of the Iranian Economy: A DSGE Approach

In the area of monetary policy, interest rate is regarded as a direct monetary instrument and required reserve ratio is as an indirect monetary instrument which in Iran, they are enforced by the monetary authorities to the banking system and will affect its behavior. In this paper, we study the balance sheet effects of the two policies using financial statements data of banking system, System of National Accounts and New Keynesian Stochastic Dynamic General Equilibrium model taking advantage of the statistics for the period 1981-2012. Calibration methodology is used to compute the parameters of DSGE model. We analysis Impulse Response functions and the first and second moments. Results show that an interest rate positive shock by one standard deviation causes the deposits and loans to be, respectively, about 8 and 25 percent higher than the steady state. On the other hand, a positive shock of required reserve ratio by one standard deviation has an impact opposite to the effect of an increase in banking interest rate on the balance sheet. Hence, the consequence of a positive interest rate shock is an increase in output and reduction in inflation and the consequence of shock relative to the required reserve ratio is a decrease in output and an increase in inflation.