The impact of financial system on economic growth in Iran: Markov- Switching approach

Although the importance of the financial sector in economic growth and development has been shown by numerous studies, but which financial structure can lead to economic growth, different results have been achieved from previous studies. This difference, on the one hand, is rooted in the structure and conditions of each country, and on the other hand, the impact of financial structure on economic growth can be different at different times (such as the period of boom and stagnation). Therefore, considering the necessity of conducting such a study for the Iranian economy using the appropriate techniques that achieve this goal, in the present study, with the introduction of bank-oriented and market-oriented financial structure, the effect of each one on Iran's economic growth has been studied using the Markov-Switching nonlinear technique for seasonal data during the 2001:4-2014:4 period. The results showed that there is a statistically significant relationship between the financial structure of the country and economic growth, so that in a recession, the bank-oriented financial structure has a more effective effect than the market-oriented financial structure on GDP growth of Iran. Therefore, it can be recommended that economic policy makers and economic planners in the periods of recession can shift the firms financing needed towards banks and, in the periods of expansion, get help from the capital market as an arm of financing of firms. In addition, in all economic conditions, it is necessary to pay attention to the improvement of the financial sector of the economy.