Modeling the Mechanisms and Consequences of Credit Shocks, Including Shocks to Deposit Profit Rates and Bank Loan and Credit Interest Rates, and Financial Shocks, Including Asset Price Shocks, Using a Dynamic Stochastic General Equilibrium Model

Abstract

The objective of this study is to investigate the transmission mechanisms and macroeconomic effects of credit shocks (including deposit and lending rate shocks) and financial shocks (including asset price shocks) on key macroeconomic variables in Iran within a dynamic stochastic general equilibrium framework. This study employs a quantitative and analytical approach based on a dynamic stochastic general equilibrium (DSGE) model tailored to the structural characteristics of the Iranian economy. The model incorporates key sectors including households, firms, the banking system, government, and the external sector, allowing for the integration of financial frictions, credit markets, and asset price dynamics. Empirical support is provided through descriptive-comparative analysis across selected countries and time-series analysis for Iran over the study period. Key variables include financial development indicators (such as trading value to GDP, number of listed firms, turnover ratio, bank deposits, private sector credit, and market capitalization), macroeconomic indicators (real GDP, inflation, consumption, investment), and nominal variables (interest rates, exchange rates, liquidity). Bivariate regressions and correlation analyses are used to examine relationships between financial variables and macroeconomic performance. The findings indicate that higher levels of financial development are positively associated with real per capita income and negatively associated with inflation across countries. In Iran, financial market expansion and increased liquidity are positively correlated with consumption, investment, and GDP, while also showing a positive but weaker relationship with inflation. Banking sector development and private sector credit exhibit a positive relationship with real economic performance and an inverse relationship with inflation. Asset price shocks and financial market growth significantly influence macroeconomic variables through wealth, expectations, and financing channels. Additionally, liquidity growth and exchange rate fluctuations are found to be strongly associated with financial market dynamics, indicating the presence of intertwined nominal and real transmission mechanisms. The study concludes that credit and financial shocks play a fundamental role in shaping macroeconomic dynamics in Iran, with both banking and capital market channels jointly influencing economic performance.