Comparing Effects of Monetary Shocks Caused by Monetary Base and Monetary Multiplier in Iranian Economy

Abstract

Designing a New-Keynesian dynamic stochastic general equilibrium model, in this paper, we evaluate the impacts of monetary shocks originated from monetary base and monetary multiplier on fluctuations of macroeconomic variables in Iranian economy. Due to importance of financial sector in transmition of economic policies effects, banking system and its current status such as fixed asset accumulation and NPLs has been added to the baseline model. Calibration of parameters of model according to quarterly data of Iranian economy during period 1990-2014 shows that the model fits the data quite satisfactorily. We find that a negative shock to reserve requirement results in slight output growth and inflation while a positive shock to banks’ borrowing from central bank results in output decline and higher inflation. In other words, for the same amount of liquidity growth, increasing of liquidity from a change in monetary multiplier, in contrast to change in monetary base, results in lower inflation and stimulating output. Therefore, it has been suggested that monetary authority should control the amount of borrowings made by banks and, instead, decreases their reserve requirement ratio as an incentive tool. This approach will encourage banks to adhere to their credit line limits and avoid overdrafts which result in higher level of stability in macroeconomic variables through monetary discipline.

Keywords

• dsge
• monetary policy
• monetary base
• monetary multiplier
• banking system