Testing the Effects of Exchange Rate Jumps and Global Financial Crisis Using the Overshooting Dornbusch Model for the Financial Stability of the State Banking System of Iran's Economy

Economic studies since 2000 have been more inclined to identify factors that affect the stability of banks, such as global financial crises, oil fluctuations, and exchange rate fluctuations. Due to the strong dependence of the country's economy on the banking system, the banking system’s stability is doubly important and it is significant to study the factors that disrupt this stability. This study examined the financial stability of the state banking system of Iran's economy by using the Markov switching regime econometric model and the overshooting Dornbusch Model during the years of 1984-2018. Also, the global financial crisis was taken into account based on the impact of exchange rate jumps. Based on the results, the amounts of width from the origin in the first and second regimes were 0.03 and -4.05 and the variance of the disturbance components related to the first and second regimes were equal to 0.73 and 3.51, respectively. The results showed that with the occurrence of negative oil shocks, foreign exchange earnings of Iran's economy decreased and despite currency price jumps, financial crises, and increasing credit risk, banking stability decreased due to high risk of banking activity (credit risk) and transfer. It is often said that for price stability and even economic stability, instability and liquidity flows should be avoided because if the growth of liquidity is much greater than the growth of production, according to the simple implication of some money theory, this will lead to inflation and price growth. However, it should be noted that the level of liquidity and money creation in the economy and the optimal ratio of liquidity to GDP depend on the structure of each economy, the technological complexities of goods and services, and the number of stages of their construction. Therefore, for each economy, a certain level of liquidity and money creation cannot be justified as a general rule, but the quantity of liquidity and money creation in each economy depends on the structural, technical conditions of the economy and commodities, speculative attacks, and foreign exchange market pressure. Therefore, expansionary monetary policies need to be adjusted in terms of whether or not the exchange rate is stabilized.