Macroeconomic Instability and Commercial Bank Lending (Case Study: Iran 1974-2009)

Abstract

This study aims primarily at investigating the impact of macroeconomic instability on lending behavior of banking sector in Iran using data on commercial banks and macroeconomic instability from 1974 to 2009. Our results under the Co-integration and Vector Error Correction Modeling framework show that bank lending has a long-run relationship with macroeconomic instability. In other words, the long-term increase in macroeconomic instability indicators would be associated with reduction in commercial bank lending. In addition, an increase in the natural logarithm of assets of commercial banks (as a proxy of bank size), have a significant effect on the lending behavior of commercial banks. The results also show that although the ratio of deposits to capital and lending behavior of commercial banks are interacted with each other in the long run, but in the short term the error of balance does not adjust itself. Simply saying, although the ratio of deposits to capital has a long-run effect on the lending behavior of commercial banks but it is not affected by lending behavior of commercial banks. In fact, the variable of deposits to capital ratio is weak exogenous when compared with other variables.

Keywords

• macroeconomic instability
• commercial banks’ lending
• iran