A Model of Financial Shocks at Bank and Interbank of Iran ( DSGE )
This paper proposes a fully micro-founded framework that incorporates optimizing banks, into a DSGE model, and evaluates the role of banks and financial shocks in the Iranian business cycles. We assume banks that offer different banking services and interact in an interbank market. Loans are produced using interbank borrowing and drposit. Banks have monopoly power, but cannot set nominal deposit and prime lending rates. The model also includes financial and unconventional monetary policy shocks. The main findings are that: (1) The model captures the key features of the Iranian economy; (2) bank behavior substantially affects credit supply conditions and the transmission of different shocks; (3) financial shocks have significant effects on the Iranian business cycle fluctuations.