Effects of Removing Forced Interest Rate Rules in the Banking Industry on the Effect of Monetary Policy by DSGE Model

Daliri, Hassan; Mehregan, Nader

doi:10.22059/jte.2014.52441

Effects of Removing Forced Interest Rate Rules in the Banking Industry on the Effect of Monetary Policy by DSGE Model

Document Type : Research Paper

Authors

Hassan Daliri ¹

Nader Mehregan ²

¹ Assistant Professor, University of Golestan, Faculty of Science,

² Associate Professor, Economics, Bu Ali sina University,

10.22059/jte.2014.52441

Abstract

Iranian banks can not freely determine their interest rates in the financial market. This characteristic causes banking industry unable to perform their duties of financial intermediaries in the transmission mechanism of monetary. In these circumstances, monetary shocks will have a significant and high effect on the alternative markets (like stocks and housing). In this study, we used dynamic stochastic general equilibrium models (DSGE). We will examine what would happen if banks can adjust their interest rates. The results show that economic variables are more sensitive to free interest rates on loans compared to deposits interest rates. However, if banks are free to determine the interest rate on loans, monetary shocks lead to less volatility in real variables (output, employment, investment), and more volatility in inflation and other nominal variables.
JEL Classification: E43, E44, E58, C11, G12

Keywords

Banking Industry

Bayesian estimation

dynamic stochastic general equilibrium

prescriptive interest rate