Short-term and Long-run Effects of Income Inequality on Banking Crisis in Iran; ARDL Approach

اقتصاد پولی مالی

Article 3, Volume 27, Issue 20, January 2021, Pages 47-77   

Document Type: پژوهشی

DOI: 10.22067/mfe.2020.39556

Authors

Mohammad Sharif Karimi^{* 1}; maryam heidarian^{* 2}; Masoud Cheshmaghil³

¹Assistant Professor of Economics, Razi University

²Ph.D. in Public Sector Economics, Razi University

³Ph.D. student in Economics, Sistan and Baluchestan University

Abstract

Extended abstract
1- INTRODUCTION
Banks in Iran, like other developing countries, have a more sensitive role in financing due to the limited activities of other financial institutions. Therefore, the occurrence of a crisis in this sector can jeopardize financial stability. One of the most important signs of a banking crisis is the sudden influx of depositors into banks to withdraw their deposits. Due to government support, the Iranian banking sector has never faced a sudden demand from depositors. However, under the influence of state ownership, the country's banks increased the volume of their loans from the mid-2001s, which led to a high volume of overdue debts, and the Iranian banking system, from the first quarter of 2005 to the second quarter of 2009, is constantly facing crisis.
2- THEORETICAL FRAMEWORK
Given that along with the money market as a tool for financing firms, the currency market is also active, so in a situation where due to high fluctuations in the recent market is an unsafe situation and full of uncertainty in the business environment. It happens that the credit risk of firms increases, and in these circumstances, firms that use credit and bank facilities as a source of financing for the development of production units may have difficulty in repaying these facilities and in As a result, due to the inability of firms to fulfill their obligations, the balance between assets and liabilities of banks is upset and the banking crisis is prepared.
3- METHODOLOGY
To investigate the relationship between income inequality and the banking crisis in Iran during the period 1980-2019, the following model, inspired by Ray and Kim's study, has been used. In this logarithm model, the ratio of domestic credit to adjusted GDP (real domestic credit) is considered as a dependent variable. The famous Gini index has also been used to show the degree of inequality. Explanatory variables of the model, in addition to the Gini index, include the logarithm of GDP, the logarithm of the volume of liquidity, the logarithm of real gross capital, the logarithm of the ratio of public debt to GDP, the logarithm of the real exchange rate and the output gap. In this study, to investigate the relationship between variables in the Iranian economy, the self-return model with wide interruption and boundary tests have been used.
4- RESULTS & DISCUSSION
The existence of a short-run relationship between the independent variables of GDP, real exchange rate and output gap with the dependent variable of the ratio of domestic credit to GDP is confirmed. In other words, in the short run, with increase in GDP and the output gap of its potential, the amount of domestic credit to production will increase, leading to a banking crisis.
In the long run, there is a relationship between all the independent variables of the model and the dependent variable. The results of the relationship between the Gini coefficient and the banking crisis index also show a positive and significant relationship that due to increasing income inequalities and people's demand for facilities, the volume of loans granted increases and debts can be expected to increase, so this issue it will lead to the escalation of the banking crisis in the country.
5- CONCLUSIONS & SUGGESTIONS
The results of the model estimate in the short run indicate that there is no significant relationship between income inequality and the banking crisis, but in the long run this relationship has shown a positive effect, so that with a one percent increase in the Gini coefficient, 1.39 percent increase in the ratio of domestic credit to production has led to a banking crisis.
Regarding other variables, it can be said that with increase of production, investment, production gap, banking crisis has intensified, but with increase of exchange rate and liquidity, this effect will have a decreasing trend.

Keywords

Income Inequality; Banking Crisis; Auto Regression Model with Border Distribution Intervals; Iran

Supplementary Files

07-abstreact 20.pdf

References

 

References

• Development of financial markets and income inequality in Iran
• توسعه بازارهای مالی و نابرابری درآمدی در ایران
• Development of financial and income inequality markets in Iran
• توسعه بازارهای نابرابری مالی و درآمدی در ایران
• Can't load full results
• Try again
• ..
• ..
• Development of financial markets and income inequality in Iran
• توسعه بازارهای مالی و نابرابری درآمدی در ایران
• Development of financial and income inequality markets in Iran
• توسعه بازارهای نابرابری مالی و درآمدی در ایران
• Can't load full results
• Try again
• ..
• ..
• Assari Arani, A. Agheli, L & Shafiei, S. 2014. “The Impact of monetary policies on Income distribution in Iran”. Quarterly Journal of Quantitative Economics. 2014. Vol. 6, Issue 22, pp: 105-128. (In Persian).
• Babecký, J.; Havránek, T.; Matějů, J.; Rusnák, M.; Šmídková, K. & Vašíček, B. (2012). “Leading indicators of crisis incidence: Evidence from developed countries”. Journal of International Money and Finance, Issue 35, pp: 1-19.
• Bannerjee, A.; Dolado, J. J.; Galbraith, J. W. & Hendry, D. F. (1993). “Cointegration, Error Correction, and the Econometric Analysis of Non-Stationary Data”. Oxford: Oxford University Press.
• Bardsen, G. (1989). “Estimation of Long -Run Coefficients in Error Correction Models”. Oxford Bulletin of Economics and Statistics, No. 51, pp: 345– 350.
• Barrell, R.; Davis, E.; Karim, D. & Liadze, I. (2010). “Bank regulation, property prices and early warning systems for banking crises in OECD countries”. Journal of Banking & Finance, 2010, vol. 34, issue 9, PP: 2255-2264.
• Bellettini, G. & Delbono, F. (2013). “Persistence of High Income Inequality and Banking Crises: 1980-2010”. Fiscal Policy, Macroeconomics and Growth. CESIFO WORKING PAPER, NO. 4293
• Bellettini, G.; Delbono, F.; Karlström, P. & Pastorello, S. (2019). “Income inequality and banking crises: Testing the level hypothesis directly”. Journal of macroeconomics, Vol. 62.
• Bernanke, B.S. (1983). “Nonmonetary effects of the financial crisis in the propagation of the Great Depression”, American Economic Review, vol.73, pp: 257–76.
• Bordo, M.D. & Meissner, C.M., 2012. “Does inequality lead to a financial crisis?”. Journal of Money Finance, Vol. 31, 2147–2161.
• Borio, C.; Furfine, C. & Lowe, P. (2001). “Procyclicality of the financial system and financial stability: Issues and policy options”. BIS papers, Vol 1, pp: 1-57.
• Calomiris, C. & Mason, J.R. (1997), “Contagion and bank failures during the Great Depression: the Chicago 1932 bank panic”, American Economic Review, Vol.87, Issue 5, pp: 63_883.
• Caprio, G. & Martinez-Peria, M. S. (2000). “Avoiding disaster: Policies to Reduce the Risk of Banking Crises”. Discussion Paper, Cairo, Egypt: Egyptian Center for Economic Studies.
• Caprio, G. & Summers, L. (1993). “Finance and Its Reform: Beyond Laissez-Faire”. World Bank Policy Research Working Paper, 1171.
• Central Bank of the Islamic Republic of Iran. (www.cbi.ir). (In Persian)
• Choong, C. K.; Law, S. H.; Yusop, Z. & Choo, S. S. (2005). “Export-led Growth Hypothesis in Malaysia: A Revisit”. The ICFAI Journal of Monetary Economics4, No. 3, pp: 26–42.
• Davis, E. P. & Karim, D. (2008). “Comparing early warning systems for banking crises”. Journal of Financial stability, Issue 4(2), pp: 89-120.
• Davis, E.P. & Zhu, H. (2004). “Bank lending and commercial property prices, some cross country evidence”. BIS Working Paper. No. 150.
• Demirgüç-Kunt, A. & Detragiache, E. (1997). “The Determinants of Banking Crises: Evidence from Developing and Developed Countries”. IMF Working Paper, vol.106.
• Demirgüç-Kunt, A. & Detragiache, E. (2005). “Cross-Country Empirical Studies of Systemic Bank Distress: A Survey”. IMF Working, Paper, 96.
• Derakhshan, M. (2008). “The Nature and Causes of Financial Crisis in 2008 and its Impact on Iranian Economy”. Center for Strategic Research, Thehran, 2008. (In Persian).
• Diamond, D. W. & Dybvig, P. H. (1983). “Bank runs, deposit insurance, and liquidity”. The journal of political economy, pp: 401-419.
• Domac, I & Martinez, Peria, M.S. (2003). “Banking crises and exchange rate regimes: Is There a Link? ” .Journal of International Economics, Issue 61, pp 41-72.
• Ebrahimi, M. & Ale Morad, M., (2008). “Development of financial markets and income inequality in Iran”. Jounnal of Monetary and Banking Reasearch, 2008, vol.2, Issue 6, pp: 109-131. (In Persian)
• Goldstein, M. & Turner, P. (1996). “Banking Crises in Emerging Economies: Origins and Policy Options”. BIS Economic Papers, No. 46.
• Haubrich, J.G. (1990). “Nonmonetary effects of financial crises: lessons from the Great Depression”. Journal of Monetary Economics, Vol.25, Issue 2, pp: 52_223.
• Herring, R. J. & Wachter, S. M. (1998). “Real Estate Cycles and Banking Crises”, An International Perspective (No. 298). Wharton School Samuel Zell and Robert Lurie Real Estate Center, University of Pennsylvania.
• Kaminsky, G. & Reinhart, C.M. (1999), “The Twin Crises: the Causes of Banking and Balance of Payments problems”, American Economic Review, 89.
• La Porta, R.; Lopez-de-Silanes, F. & Shleifer, A. (2002). “Government Ownership of Banks”. Journal of Finance, Isuue 57, pp: 265–30.
• Laeven, L. & Valencia, F. (2008). “Systemic Banking Crises: A New Database”. IMF Working Paper, No. 224.
• Marashdeh, H. (2005). “Stock Market Integration in the MENA Region: An Application of the ARDL Boundsss Testing Approach”. University of Wollongong Australia, Economics working Paper, pp: 5-27.
• Marchionne, F & Parekh, S. (2015). “Growth, Debt and Inequality”. Economic Issues, Vol. 20, Part 2. 
• Mehregan, N., Abbasian, E., Ardalan, B., 2014. "Multiple Analysis of Income Inequality in Iran with an Approach to the Generalized Gini Coefficient", Quarterly Journal of Economic Development Policy, Al-Zahra University, 2 (2). (In Persian).
• Mishkin, F. S. (2001). “The Economics Of Money, Banking And Financial Markets”,6 th Edition, Boston : Addison Wesley.
• Moshiri, S., and Nadali, M., 2013. "Identifying the effective factors in the banking crisis in the Iranian economy", Quarterly Journal of Economic Research (Islamic-Iranian approach), 13 (48), 27-1. (In Persian).
• Pahlavani, M.; Wilson, E & Worthington, A. C. (2005). “Trade-GDP Nexus in Iran: An Application of the Autoregressive Distributed Lag (ARDL) Model”. Faculty of Commerce Papers, University of Wollongong.
• Pascal, P. (2017). “Historical Patterns of Inequality and Productivity around Financial Crises”. Working Paper Series 2017-23, Federal Reserve Bank of San Francisco, revised 25 Sep 2017.
• Perez-Campanero, J. & Leone, A. M. (1991). “Liberalization and financial crisis in Uruguay, 1974-87”. Banking crises: Cases and issues, pp: 276-375.
• Perugini, C.; Hölscher, J. & Collie, S., 2015. “Inequality, credit, and financial crises”. Cambridge Journal of Economics, Issue 39(1), pp: 1-31
• Pesaran, M. H. & Shin, Y. (1999). “An Autoregressive Distributed Lag Modeling Approach to Cointegration Analysis”. Chapter 11, Cambridge University, Cambridge.
• Pesaran, M. H. & Resaran, B. (1997). Microfit 4.0, Oxford University press.
• Pesaran, M. H.; Shin, Y. & Smith, R. (2001). “Bound Testing Approaches to the Analysis of Level Relationships”. Journal of Applied Econometrics, No.16, pp: 289-326.
• Prvin, S. & Taherifard, E., (2008). “The Effects of Monetary Policy on Poverty and Distribution (the Case of Iran)”. Quarterly Journal of Economic Research, Research Institute of Economics. 2008, Issue 4(8), pp: 95-128. (In Persian).
• Rajan, R.G. (2010). “Fault Lines: How Hidden Fractures Still Threaten the World Economy”. Princeton University Press, Princeton.
• Rhee, D. & Kim, H. (2018). “Does income inequality lead to banking crises in developing countries? Empirical evidence from cross-country panel data”. Economic Systems, Issue 42, pp: 206-218.
• Santos, J. A. (2001). “Bank capital regulation in contemporary banking theory: A review of the literature”. Financial Markets, Institutions & Instruments, Issue 10(2), pp: 41-84.
• Shajari, P., Mohebikhah, B., 2010. "Prediction of Banking Crises and Balances Using the KLR Marking Method (Case Study: Iran)". Money and Economics Quarterly, 4, 152-115. (In Persian).
• Shakeri, A., Maliki, A., 2009. "Evolution in the idea of ​​income distribution in the twentieth century". Economic Research Journal. 9 (4), 88-57. (In Persian).
• Shrestha, M. B. & Chowdhury, K. (2005). “ARDL Modelling Approach to Testing the Financial Liberalization Hypothesis”. Economics Working Paper, Australia: University of Wollongong, pp: 5- 15.
• Statistics Center of Iran, Statistical Yearbook of the country, 2015.
• Stiglitz, J. E. (2012). “The Price of Inequality: How today’s Divided Society Endangers Our Future”. W.W Norton & Co, New York.
• Stockhammer, E. (2015). “Rising inequality as a cause of the present crisis”. Cambridge Journal of Economics, Issue 39(1), pp: 1-31.
• Tang, T. C. (2003). “Japanese Aggregate Import Demand Function: Reassessment from ‘Bound’ Testing Approach”. Japan and the World Economy, No. 4(15), PP: 419–436.
• Von Hagen, J & Tai-kuang, H. (2004). “Money Market Pressure and the Deter-minants of Banking Crises”. Journal of Money, Credit and Banking, Vol. 39, Isuue 5.
• World Bank, World Development Indicators (2018). (worldbank.org).
• Zarei, Z & Komijani, A. (2015). “Identification and Prediction of Banking Crisis in Iran”. Quarterly Journal of Economical Modeling, 2015, vol. 9, pp: 1-23. (In Persian).