The effects of financial instability on macroeconomic variables with an emphasis on the role of banks with the DSGE approach

Financial instability refers to a situation in which the economy has suffered losses and problems under the influence of asset price fluctuations or the poor performance of financial institutions in fulfilling their obligations. Fluctuations in asset prices and unstable performance in the country's financial markets have led to the spread of instability and this has shown the weak financial depth in the country's financial markets. The financial instability index is created from the change in the amount of interest rate variables, financial depth, internal credit provided to the private sector, internal credit provided by the banking sector, liquidity, bank liabilities, traded stock value and stock market turnover. Risk and return indicators such as interest rate and liquidity include those that show that financial risk increases or decreases and therefore can disrupt the stability of the financial sector. Also, the interest rate is an estimator of the efficiency of the banking sector, and with its increase, loans are taken by more risk-taking people, and bank arrears increase, and more loans are used in the buying and selling of assets and speculation, and this indicates financial instability. On the other hand, one of the criteria of an efficient and stable financial system is that it supports economic activities in a proportionate way and by allocating and providing facilities in the appropriate amount, it can improve investment and consumption, because providing and increasing facilities too much can be a risk. impose on the economy and financial system and lead to the occurrence of crisis and instability, therefore the growth of facilities and the growth of the ratio of facilities to GDP can be a measure for the occurrence of instability and crisis.

The purpose of this paper was to investigate the effects of financial instability on macroeconomic variables in Iran. For this purpose, the statistical information of the period 1988-2021 has been used based on the frequency of seasonal data. In order to model the effects of financial instability on macroeconomic variables, we used the Dynamic Stochastic General Equilibrium (DSGE) model.

The results showed that the shock caused by financial instability led to an increase in interest rate, inflation rate, exchange rate and production deviation and also led to a decrease in the growth of consumption, investment and banking facilities.According to the obtained results, it can be stated that financial instability through the mechanism of inefficiency in the allocation of resources and non-optimal allocation of resources has led to disturbance in the movement of financial resources from savers to investors, which has resulted in instability. In economic growth and as a result it causes disturbance in macroeconomic variables. The results obtained from the financial instability shock showed that it has led to an increase in the inflation rate through the change in the bank interest rate, and this issue itself has affected the increase in the exchange rate in the country's economy. Also, the relationship between financial instability and the performance of the real sector of the economy has also been two-way. The financial status of economic enterprises is one of the factors that affect the level of financial instability in an economy, when borrowers do not have the ability to repay their debts, a kind of financial pressure is imposed on both parties, that is, the borrower and lender. This financial pressure can accelerate financial instability and therefore this factor leads to disruption in economic activities including production and investment.

Conclusion and Policy Implications: 

According to the results, there are the close relationship between the financial sector and the real sector of the economy. In the financial industry, mistakes made by management can have significant external impacts in addition to individual financial sector problems. Therefore, it is necessary for the financial business to be regulated and the financial supervisor monitors the risks of financial sector. However, systemic risks are related to the structure of the financial sector business model. Furthermore, there is always the possibility that one of the thousands of financial sectors may face overwhelming risks, which can lead to doubts and problems being directed towards the entire industry.Financial instability is a real or expected threat to financial markets or financial institutions due to an event, which could potentially, if public authorities do not intervene, lead to problems. Recent events are a mixture of the situation, broader themes, and individual mistakes. Each event and crisis are unique, so while generalizations can be made, caution must be exercised.Also, the implementation of unconventional policies in the markets, such as the purchase and supply of bonds, can lead to a decrease in financial instability in the economy through the channel of expectations. In the end, non-violation of the announced policies by policymakers will be the most important factor in reducing financial instability. Also, considering the uncertainty and risk in the financial and banking sector of the economy, it can be said that the most important obstacle for economic activists to start or develop their own businesses is the lack of financial resources to meet capital needs. Obtaining the necessary funds to start their businesses has always been an important issue for participants in economic projects. If it is difficult and time-consuming to obtain the required funds, it will discourage them from economic activity, and without sufficient financing, their activities will not be successful. Therefore, the reduction in financial instability and the increase in the efficiency of financial institutions can have positive effects on the economy through financing.