The Impact of Monetary Policy Shocks from the Exchange Rate Channel on the Health of Iran's Banking System

اقتصاد پولی مالی

Article 4, Volume 30, Issue 25, July 2023, Pages 99-134   

Document Type: Original Article

DOI: 10.22067/mfe.2023.78781.1234

Authors

Farhad Sharifi Bagha¹; Jafar Haghighat^{* 2}; Zahra Karimi Takanlou³

¹Ph. D Student of Financial Economics of Tabriz University, Tabriz, Iran

²Professor of Economics, University of Tabriz, Tabriz, Iran

³Associate Professor of Economics, University of Tabriz, Tabriz, Iran

Abstract

 
1- INTRODUCTION
Monetary policy, as one of the most important economic tools that affects various economic variables through different channels and with different speed and intensity, has always been the attention of the responsible authorities of countries, especially developing countries like Iran. On the other hand, banks, as financial and credit institutions that have a special place in the country's economy, play a decisive role in the circulation of money and society's wealth. Therefore, examining the impact of monetary policy shocks on the health of Iran's banking system, which is done through the exchange rate channel, is particularly important and is the main goal of this research. Therefore, by using 96 variables of seasonal time series data affecting the bank's profitability index, which is one of the most important indicators of measuring and judging the health of the banking system during the period of 1401:4-1378:1 and using the experimental model of the factor- Added (FAVAR), we investigate the effect of monetary policy through the exchange rate channel on the health of the banking system in Iran. The results show the direct effect of monetary policy through the exchange rate channel on the growth rate of bank network deposits and consequently the power to grant facilities, the amount of bank operating income and the growth rate of bank claims, which from this point of view is one of the most important indicators of the health of the system. A bank that has a profitability index has a negative and significant effect. On the other hand, the effect of monetary policy shocks through the exchange rate channel on the amount of deposit attraction (current, short-term, long-term Rial and foreign currency deposits) and the amount of power to grant facilities and the bank's operating income (income from granting facilities, income from of foreign exchange) is negative and significant and has a positive and significant effect on the amount of claims in the bank.
2- THEORETICAL FRAMEWORK
Anzwaini et al. (2012) conducted a study aimed at the impact of monetary policy shocks on commodity prices. Global monetary conditions are often cited as a driver of commodity prices. This paper examines the empirical relationship between US monetary policy and commodity prices using a standard VAR system, which is commonly used in analyzing the effects of monetary policy shocks.
Jordo et al. (2019) conducted a study with the aim of whether SVARs identify unconventional monetary policy shocks? they did. We show that the used identification schemes have not been able to recover real unconventional monetary policy shocks in the Eurozone. In their identification schemes, information on the size of the central bank's balance sheet is key to distinguishing monetary policy shocks from other shocks that reduce financial market stress.
Niazi Mohseni et al. (2019) conducted a study with the aim of investigating the effect of monetary policy shocks and oil revenues on inflation and economic growth in Iran. In this study, the data of the explained variables were used for the period of 1357 to 1397. Data analysis was done using STATA software. The results of this study showed that the increase in the bank interest rate has reduced the economic growth rate for at least two years after the application of the shock, and after that the effect of the shock tends to zero.
Asefi et al. (2021) conducted a study on the effect of monetary policy through the asset price channel on financial development. In this study, using seasonal time series data of 110 economic variables in the period of 1370-1390 and self-explanatory model A generalized factor (FAVAR), the impact of monetary policies has been evaluated through the channel of housing and stock prices. The results of the impulse response functions indicate that the housing price channel has increased production in the medium and long term, but it has also had significant inflationary effects in the short and medium term.
 
3- METHODOLOGY
FAVAR model introduced by Bernanke et al. (2005) is a combination of VAR model and factor analysis model. Composite dynamics (Yt, Ft) should be assumed as equation 1.
According to the statistical limitations in Iran, the time period investigated in this data research will be the years 2012-2021 and the research variables include three categories:
Table 1: Introduction of Xt vector variables, Yt vector exogenous variables and F vector hidden factors




Brief description of the variable


 


Brief description of the variable


 




Rial long term deposit


LDR


Long-term currency deposit


LDF




Rial short term deposit


SDR


Short term currency deposit


SDF




riyal current deposits


DDR


Currency current deposits


DDF




Lending


loan


Claims of non-governmental entities


DI




Government claims to the bank


Dig


exchange rate


EXCH




Claims of other banks and financial institutions to the bank


Dib


Income from granting facilities


Inl




Income from currency exchange


Bc


Other variables as hidden factors


بردار




 
The equation can be written as follows using model variables:
 
4- RESULTS & DISCUSSION
The results obtained from the findings show that the monetary policy through the exchange rate channel has led to a direct effect on the deposits of the banking network and as a result the power to grant facilities and the amount of non-current bank claims which as a result It has an impact on one of the most important indicators of the health of the banking system, which is the profitability index, and this impact is negative and significant. Also, the effect of monetary policy shocks through the exchange rate channel on the amount of deposit attraction (current, short-term, long-term Rial and foreign currency deposits) and the amount of power to grant facilities and the bank's operating income (income from granting facilities, income from of foreign exchange) is negative and significant and has a positive and significant effect on the number of claims in the bank.
 
5- CONCLUSIONS & SUGGESTIONS
Considering the importance of the banking sector, in this study, using the FAVAR model, the impact of monetary policy shocks through the exchange rate channel on the health of the banking system of Iran during the years 2012-2021 was investigated.
At the beginning, the unit root test was used to measure the significance of the variables using Stata software, and all the variables were at the significance level.
In the following, with the help of Schwarz-Baysin, Akaik and Hanan-Quinn criteria, as well as the maximum likelihood statistic, the optimal interval is determined, and since these criteria do not yield the same results, the AIC criterion is used to determine the optimal interval length. and the obtained optimal interval length is specified as one. According to the obtained results, using the FAVAR model is very suitable for measuring the relationships between variables. The results of the model estimation results show that the monetary policy through the exchange rate channel has led to a direct effect on the deposits of the banking network and consequently the power to grant facilities and the amount of non-current bank claims, which is one of the most important the health indicators of the banking system, which is the profitability index, are effective. For this reason, fluctuations caused by monetary policy shocks in the exchange rate, as one of the most important factors affecting the health of the banking system, will have a negative and significant impact.
Also, the effect of monetary policy shocks through the exchange rate channel on the amount of deposit attraction (current, short-term, long-term Rial and foreign currency deposits) and the amount of power to grant facilities and the bank's operating income (income from granting facilities, income from of foreign exchange) is negative and significant and has a positive and significant effect on the number of claims in the bank

Keywords

Monetary policy; Exchange rate; Health of Iran's banking system; FAVAR

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