Sensitivity Analysis and Ranking of Factors Affecting Iranian Financial Stability in the Framework of Composite Index Construction

The financial system is stable when it has a positive effect on the performance of the economy and does not hinder it. Accordingly, a financial system must be able to withstand shocks and keep the allocation of savings, data transfer, payment system, etc. efficient and effective. In this study, first using global experience and data from Iran from 1990 to 2016, an aggregate index of financial stability under the four dimensions of "debtor institutions", "macroeconomics", "foreign sector" and "institutional quality" for Iran was built. After constructing the aggregate index, the most effective indicators on the "fluctuations" and "average value" of the aggregate financial stability index have been identified using the sensitivity analysis method. The results show that of the 48 available indicators, the "ratio of government budget deficit to GDP", which is one of the main indicators of "government financial health" in the "institutional quality" dimension, has the most negative effect on "fluctuations" and "average value" of the aggregate index of financial stability. Therefore in order to improve financial stability in Iran, the greatest focus should be on controlling the "ratio of government budget deficit to GDP.