The Effect of Monetary Base Combination on Interest Rates in Iran

Rahmani, Teymur; Shasti, Fatemeh; Mohammadkhanlou, Hossein

doi:10.22059/jte.2025.390588.1008984

The Effect of Monetary Base Combination on Interest Rates in Iran

Document Type : Research Paper

Authors

¹ Department of Theoretical Economics, Faculty of Economics, University of Tehran, Tehran, Iran

² Department of Theoretical Economics, Faculty of Economics, University of Tehran, Tehran, Iran.

10.22059/jte.2025.390588.1008984

Abstract

Since 2014, nominal interest rates—and at times, real interest rates—have tended to remain high. After a decline in interest rates in late 2019 and early 2020, they resumed an upward trend. In both media discussions and academic research, there appears to be some confusion regarding the causes of high interest rates. This study, based on well-established macroeconomic theories, seeks to identify the factors influencing interest rates and, in particular, the reasons behind their elevated levels in recent years. In line with theoretical analyses, the yield on government debt securities in the secondary market has been used as a proxy for the interest rate. The study primarily focuses on examining how, in addition to conventional and well-known determinants of interest rates, the injection of base money into the economy and the share of borrowed reserves contribute to interest rate determination. Accordingly, alongside a brief review of theoretical analyses and relevant empirical studies, the study estimates the relationship between interest rates and their determinants using monthly data for the period from August 2015 to August 2024. The estimation results indicate that an increase in banks’ debt to the central bank leads to higher interest rates, confirming the study’s main hypothesis. Additionally, rising expected inflation, greater financial needs—and consequently, the net debt of the public sector to banks—and increased uncertainty also exert a positive effect on interest rates.

Keywords

Main Subjects

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