Implementation of Credit Easing Policy to Settle the Government's Debt with Commercial Banks: A Stock-Flow Consistent Framework

Document Type : Research Paper

Authors

1 Department of Economic Sciences, Faculty of Economics, Allameh Tabataba'i University, Tehran, Iran

2 Department of Economic Sciences, Faculty of Economics, University of Tehran, Tehran, Iran

Abstract

The government's indebtedness to banks stands as one of Iran's most pressing issues within its monetary and banking system. This predicament has precipitated several adverse consequences, including the cost of funds for banks, elevated interest rates on loans, an unrestrained surge in the money supply, and a diminishing capacity for banks to extend loans. To tackle this challenge, some economists with emphasis on endogenous nature of money, propose a remedy grounded in credit easing. this approach entails settling the government's debt to banks by effecting adjustments on the asset side of the Central Bank's balance sheet. However, the practical execution of this policy hinges on the utilization of Central Bank resources, raising concerns about a sudden surge in money supply and potential adverse impacts on other economic variables, notably inflation. This has cast doubt on the feasibility of implementing such a strategy. In this research, we delved into the fundamental principles and prerequisites of adopting the credit easing policy in Iran. To evaluate the potential outcomes of implementing this policy, we employ the stock flow consistent model. Our findings reveal that settling the government's debt to banks through the utilization of Central Bank resources leads to an expansion in the monetary base, a reduction in money supply, an upswing in real GDP, and a decrease in both inflation and interest rates when juxtaposed with the baseline scenario.
JEL Classification: E17, E60, E12

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Main Subjects

References

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Journal of Economic Research (Tahghighat- E- Eghtesadi)
Volume 58, Issue 2 - Serial Number 143
September 2023
Pages 231-260

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History

  • Receive Date: 17 October 2022
  • Revise Date: 08 August 2023
  • Accept Date: 12 September 2023

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