Optimal Interest Rates Estimation of Banking System to Maximize Iran's Economic Growth using Simultaneous Equations System

One of the most crucial and effective tools for macroeconomic policy-making, economic stabilization and growth is the interest rating. There are three different viewpoints about interest rating with their own specific reasoning behind. Some professionals support increasing the interest rates while some others support decreasing them and at the same time a third group advocate floating the interest rates. This paper tries to estimate an optimal banking interest rate to maximize national economic growth. With this aim in mind, first, it reviews the related literature. Next, a model is described through briefly explaining the theoretical principles. System model estimation is later conducted through Three Stage Least Square method (3SLS) in various scenarios. It is revealed that there is a relationship between real interest rate and growth in investment equations in such a way that the amount of investment and production goes up when the real interest rates increase in Iran’s banking system. Real interest rates have the highest multiplier in money demand function and it shows that along with interest rates increase, a great deal of people’s money is attracted to banking system resulting in economic stability. Finally, it was reasoned that the best scenario for banking system interest rating was “inflation rate + 4%”