Monetary economy
Sosan Etemadinia; Kiumars Shahbazi; Khadijeh Hassanzadeh
Abstract
Financial instability causes uncertainty and a lack of transparency in the market and decision-making processes, ultimately leading to reduced investment and economic growth. Additionally, economic shocks alter investors’ expectations. This study relied on the seasonal data from 1991/3 to 2021/6 ...
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Financial instability causes uncertainty and a lack of transparency in the market and decision-making processes, ultimately leading to reduced investment and economic growth. Additionally, economic shocks alter investors’ expectations. This study relied on the seasonal data from 1991/3 to 2021/6 in order to identify financial shocks and their impact on macroeconomic variables such GDP, the debt-to-GDP ratio, and financial instability. The Threshold Vector Autoregression (TVAR) model was used to analyze the data. The findings showed that fiscal policies (debt-to-GDP ratio) reduce GDP. Second, positive shocks from financial instability lead to a decrease in GDP and the debt-to-GDP ratio. In the first regime, positive fiscal policy shocks (increase in the debt-to-GDP ratio) leads to an increase in financial instability, while in the second regime, positive fiscal policy shocks can reduce financial instability.IntroductionFinancial instability leads to uncertainty and a lack of transparency in the market and decision-making processes, ultimately resulting in reduced investment and economic growth. Economic shocks also alter investors’ expectations, affecting the value of current assets and influencing both the financial and real sectors. During periods of financial instability, government debt management needs to adopt specific strategies. The simultaneous occurrence of a financial crisis and an economic recession signals a major downturn, and historical evidence shows a relative correlation between economic recessions and heightened financial market instability. In times of increased financial instability, the share of overdue loans rises, and negative market sentiments reduce the value of other financial assets. Disruptions in financial markets or a high level of overdue loans on banks’ balance sheets can lead to an economic recession by restricting credit flows to other sectors. Countercyclical fiscal policy can mitigate the reduction in the private sector demand by increasing government spending or cutting taxes, thereby compensating for the diminished credit flows from a weakened financial sector. Furthermore, government spending dependent on financial aid in weak sectors can improve economic sentiments and expectations, helping to strengthen the economy. However, financial development that facilitates easy access to existing financial resources can increase financial instability due to concerns about government debt sustainability. In this respect, the present study aimed to examine the nonlinear relationship (the effects of positive and negative shocks) between financial market instability, fiscal policy, and the production sector in Iran.Materials and MethodsThis study relied on using the seasonal data from 1991/3 to 2021/6 in order to examine the relationship between financial market instability, fiscal policy, and production in Iran. The Threshold Vector Autoregression (TVAR) model was used for the analysis. The primary version of the model used in this study is as follows:yt=[LGDPt,FSIt, DFt, LCPIt, LM2t]Due to its nonlinearity, the TVAR model can capture the varying magnitudes and directions of shocks that can affect how variables impact each other. Unlike the linear VAR model, where the impact of a negative shock is merely the opposite of a positive shock, the TVAR model allows for asymmetrical effects, where shocks of different sizes and directions can yield different outcomes. Results and DiscussionAccording to the findings, fiscal policies (debt-to-GDP ratio) decrease GDP, and positive shocks from financial instability lead to a decrease in both GDP and the debt-to-GDP ratio. Moreover, a positive shock in fiscal policy (increase in the debt-to-GDP ratio) increases financial instability in the first regime, but reduces it in the second regime. Also, negative shocks have opposite effects in both regimes. This suggests that in strong regimes with high liquidity, the debt-to-GDP ratio is lower, thus reducing the risk of instability. However, when fiscal policies such as tax cuts and increased government spending are pursued in a strong economy, financial instability may increase partly due to higher tax revenue and increased government spending; however, these policies are less profitable. In weak, low-cash regimes with unsustainable and income-dependent economies, the debt-to-GDP ratio is higher, leading to greater instability. Nonetheless, appropriate fiscal policies can prevent financial instability even in weaker regimes, promoting significant economic growth without increasing the risk of financial instability. The estimated TVAR model indicates nonlinear effects in the response of variables to exogenous shocks. Based on threshold effect tests in the first model (production response), the optimal threshold value (liquidity difference) is 0.4794. Periods where the threshold variable is less than 0.4794 are categorized as low regime, while other periods are categorized as high regime. In both regimes, a positive financial instability shock reduces fiscal policy (debt-to-GDP ratio). In the first regime, a positive fiscal policy shock (increase in the debt-to-GDP ratio) increases financial instability, while in the second regime, it reduces financial instability.ConclusionThe present study employed the TVAR model and the seasonal data from 1991 to 2021 in order to examine the relationship between financial market instability, fiscal policy, and production in Iran. Unlike the linear VAR model where effects of negative and positive shocks are symmetrical, the nonlinearity of the TVAR model shows that the size and direction of shocks impact how variables interact, thus leading to different outcomes. The findings revealed a nonlinear response of variables to incoming shocks. The TVAR model results, based on threshold effect tests in the first model (production response), identified an optimal threshold value of 0.04794. Periods below this threshold are categorized as low regime. The instantaneous response functions indicated that positive shocks in financial instability negatively impact GDP in both regimes. Generally, financial instability causes market uncertainty and a lack of transparency, leading to reduced investment and decreased economic growth. Additionally, positive shocks of fiscal policies (e.g., the debt-to-GDP ratio) decrease GDP in both regimes. The instantaneous reaction functions showed that a positive shock in financial instability reduces fiscal policy in both regimes. According to the results, a positive shock in fiscal policy increases financial instability in the first regime, while it decreases financial instability in the second regime.
Aliakbar Arabmazar; Ali Askar Qasemi Rad
Volume 13, Issue 40 , October 2009, , Pages 101-123
Abstract
In this paper، the effects of bank facilities and the real rate of foreign exchange on the agricultural products exports haves been investigated modeled and studied via a macro dynamic model. Time span of this study is 1358_1385 (1979_2006). The results of this study show that، due to the first shock ...
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In this paper، the effects of bank facilities and the real rate of foreign exchange on the agricultural products exports haves been investigated modeled and studied via a macro dynamic model. Time span of this study is 1358_1385 (1979_2006). The results of this study show that، due to the first shock of increasing real rate of foreign exchange، exports of agricultural products increases but the percentage of this increase is in a relatively smalsmall amountl، and it decreases through time. as time passes it shows that exports of agricultural products doesn't increase but decreases. It means that the effect of the shock in the long run is negative.Examining the effect of increasing bank facilities onto the export of agricultural products shows that the influence of the first shock in the beginning years is almost zero but in the last years of the time span becomes positive. This examination also shows that increasing the bank facilities causes higher rate of increase in the export of agricultural products. In fact، T the credit policy in agricultural sector is a midterm or long term policy، so the effect may not be clear in the first years of the policy implementation but as time passes it becomes noticeable. Finally combining merging these two policies shows that the effect of simultaneous implementation of two policieshas a positive effect on the export of agricultural products is positive.
Gholamreza Keshavarz Haddad
Volume 6, Issue 21 , February 2005, , Pages 115-133
Abstract
In this Paper financial services in the Iranian economy, which is portioned into 41 industries, is considered as a sector with a Leontief production function. Financial Sectors, buy inputs from other sectors, and provide services to expedite the cash fellows and risk transformation for other sectors. ...
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In this Paper financial services in the Iranian economy, which is portioned into 41 industries, is considered as a sector with a Leontief production function. Financial Sectors, buy inputs from other sectors, and provide services to expedite the cash fellows and risk transformation for other sectors. The former relations are called Backward Linkage and the later relations through which the sectors provide output to meet required cash fellow and risk reduction of economic activities are called Forward Linkage. In quantification of the linkages, employment and output elasticity, the forward index of value added, and backward linkage of final demand are used. Furthermore, direct and indirect effects of a hypothetical extraction of the sectors on output and employment are calculated. The results show that, although the linkages between financial sectors and the rest of the economic activities are not strong, their extraction will result in 225246.8 decrease in job opportunity, according to the 1370 input-output table produced by the Statistical Center of Iran.
