The Effect of Banking Crises on Macroeconomic Variables Within the Dsge Models Framework

Banking crises have been widespread in recent decades in different countries and have incurred significant costs to economies. Banking crises are highly disruptive events which lead to sustained declines in economic activity, financial intermediation, and ultimately in welfare. It is then no surprise that academics and policymakers devote significant efforts to develop models to attempt to predict crises and to design policies to resolve them and mitigate their economic impacts. Due to the weakness of other financial institutions in country, the banking system is one of the main institutions which has particular importance in Iran`s economy. Financial markets persistently confront with fluctuations in assets such as housing, gold and foreign exchange where these assets are often considered as a substitution for household deposits. Because these deposits are regarded as the most significant banks’ resources, an analysis of resource shortage impact on banks’ lending power on the one hand and the effect of lending power on macroeconomic variables such as output and inflation on the other hand makes it very important. Therefore, Banking system challenges cause substantial effects on the economy, especially if it is affected by the balance sheets crisis, it doubles its significance. This research, will explaining the crisis in the banking system of the country and its dimensions. By estimating the limits of the fictitious assets of the banking system of the country and the estimation of the balance sheets insolvency; within the framework of a model dynamic stochastic general equilibrium reviews its effects on macroeconomic variables. The results show bank loss impact growth negatively through decline in capital formation, raise in inflation and increase in firm’s capital and labor costs. It increase economic volatility respectively.