Bank Lending Channel Reaction to Financial Suppression Policies

Subject Areas : Financial Economics

Fatemeh  Johari ¹ (Department of Economics, Arak branch, Islamic Azad University, Arak, Iran)
Gholamali  Haji ² (Department of Economics, Arak branch, Islamic Azad University, Arak, Iran)
Nader  Mehregan ³ (Department of Economics, Bu-Ali Sina, University, Hamedan, Iran)
Ahmad  Sarlak ⁴ (Department of Economics, Arak branch, Islamic Azad University, Arak, Iran)

Received: 2021-02-22 Accepted : 2021-06-21 Published : 2022-07-01

Keywords: lending channel, Financial repression, monetary policy transmission mechanism,

Abstract :

Iran's economy has been suffering from the dominance of fiscal policies and financial repression for many years, so that this issue has become one of the structural challenges of the country's economy. Banks, as one of the most important parts of macroeconomics, play an important role in the mechanism of transferring monetary policy to the real sector of the economy. Monetary policy transmission operates through various channels: the lending channel, the balance sheet channel, and the capital channel. Examining how the role of banks in monetary policy transmission is affected by government fiscal repression policies provides useful information for monetary and financial policymakers and banking activists. In this study, we tried to investigate the effect of financial repression on the monetary policy transmission through the lending channel of the country's banks. First, an indicator for the financial repression variable was defined using the PCA method, and then the relationship was estimated using the SVAR method and instantaneous response functions and using seasonal data for the period 1999- 2017. The results show that financial repression policies have a significant effect on bank lending and reduce banks' lending power. This issue, along with the negative real interest rate of bank facilities, causes a decrease in the profitability index and loss of banks.

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