Nonperforming Loans Impacts on Inflation and Production

Among the problems of the banking system in the economy of Iran is the NPLs (non-performing loans or outstanding claims). Accumulation of NPLs is a serious challenge for liquidity management in banks, and to the other side due to banks requests on central bank to provide liquidity lack, thereby increasing the monetary base. This study analyzes the effects of NPLs on output and inflation using the dynamic system modeling and simulation. Thus, behavioral equations estimated by Auto-Regressive distributed Lag (ARDL) methodology, along with other relations structure the system dynamic model. The powerful system dynamic software, ithink applied for system simulation and after validation tests, 5 percentage point increase in NPL rate as a step shock introduced. Results show inflation increased and GDP did not response significantly. Added restriction on Central Bank Claims on Banks (CBCB), lead to production and inflation decrease.