Financial Instability under a DSGE Modeling Approach: A Case Study of Iran

We developed a quantitative monetary DSGE model with financial intermediaries that face endogenously determined balance sheet constraints. Considering the importance of the banking sector in transferring the effects of economic policy, it has been attempted to add the financial model to the standard model. To do so, a seasonal data set from 1998 to 2016 is used. The results shows, a positive technology shock, the productivity, capital stock and labor demanded by manufacturing firms will increase as a result of household income resulting from the rental of capital and wages, as well as the consumption of goods and services and savings deposits will increase. On the other hand, due to the increase in aggregate supply, the inflation rate is decreasing. Reducing inflation and increasing the attraction of banking resources will increase financial stability banks. The positive interest rate shock as in creating financial repression diminishes the banks' financial stability by decreasing the attraction of bank resources with increasing the cost of bank credits, reducing credit and net worth of financial intermediaries. Also, government expenditures shock by creating instability demand leads to unsustainable production and short-term economic growth.