The Effect of Inflation Targeting Shock on the Balance Sheet in Iranian Banking System

Abstract

In this paper we examined the effects of inflation targeting regime based on the contents of Iranian banking system financial statements during the period of 1981-2014 using Dynamic Stochastic General Equilibrium (DSGE) model. To estimate DSGE parameters, calibration method was utilized. Moments of the data and Impulse Response Function analyses were used for model verification. The results show that the profit rate shock increases the liquidity sources of banks and as a consequence, bank lending causes an improvement in the investment and production and a decrease in inflation rate. However, inflation targeting for the purpose of reduction in deposit and loan profit rates results in reduction in bank resources and at the same time jeopardizes the soundness of banks. So, we suggest that inflation targeting regime should be combined with the policy of increasing profit rates.

Keywords

• Inflation Targeting
• Balance-Sheet Effects
• Banking System