Assessment of Macroeconomic Fluctuations and Monetary Transmission Channel in Iran; Dynamic Stochastic General Equilibrium Approach

Empirical evidence about recent financial crisis revealed the prominent roleof financial sector in transmission of different shocks to the real sector ofeconomy. Due to the importance of banking sector behavior during businesscycles and for the purpose of explaining the credit channel of monetary transmission mechanism in the economic literature, analyzing the role of banking sector during business cycles in Iran can help us to better understand how the shocks can have impacts on the economy. In this paper, we evaluated macroeconomic fluctuations and monetary transmission channels in Iranian economy using a standard New Keynesian dynamic stochastic general equilibrium model that includes banking sector. The results of the study show that inclusion of banking sector in a DSGE model can improve evaluation of macroeconomic fluctuations. Also, the results of simulation show that variables related to banking sector have pro-cyclicalmovements in Iranian economy and these results provided enough room toexplain the role of banks as financial accelerator and monetary transmission channels in Iranian economy.