Analysis of the effect of unbalanced balance sheet of banking system on monetary variables and its remedy

Iran banking system has encountered an accumulation of fictitious and frozen assets in the assets side of the banking system balance sheet. This study designs an innovative model for connecting the microeconomics of banking with macroeconomy and analyzes the key factors of creating an unbalanced balance sheet and its effect on monetary and macroeconomic variables. According to the results of this study, accumulation of fictitious assets in the assets side of the banking system balance sheet makes an unsound flow of liquidity that could jeopardize the functionality of banking system. This unsound flow of liquidity also is the key factor of interest rate rigidity despite inflation reduction and its negative effect on the macroeconomy. The estimation of a vector error correction model (VECM) with three long-run relationships indicates that the inflation rate has been reduced through the quality of liquidity reduction in recent years. Finally, due to a perilous effect of the unbalanced balance sheet on the banking system and macro economy, its remedy has presented.