Comparative analysis of the effects of monetary and government financial expenditures shocks in the context of fractional and full reserve banking in Iran: DSGE approach

The present study aims to investigate the effects of monetary and financial shocks on macroeconomic variables in fractional and full reserve banking conditions. To this end, two stochastic dynamic general equilibrium models have been designed in terms of the realities of Iran's economy and then the effects of shocks have been studied. After determining the input values ​​of the model and estimating the parameters using the quarterly data of the Iranian economy during the period 1990-2020 by Bayesian estimation method, the simulation results indicate the validity of the model in describing the fluctuations of the Iranian economy. Examining the dynamics of the model shows that the positive shock of government consumption and investment expenditures under fractional reserve banking will increase production, money supply and decrease consumption, but in full reserve banking will increase consumption, production and reduce money supply in the Iranian economy. On the other hand, the shock of monetary policy under fractional reserve banking will increase inflation, government spending, and reduce consumption, production, investment, and employment. Also, comparing the reaction functions of the selected variables in the two models shows that 100% banking has caused the contribution of shocks to the fluctuations of key variables to change and even the position of some of them to be replaced by the shocks of government spending and monetary shocks. In the shock of government expenditures, the variables of consumption, inflation and money supply and in the monetary shock, the variables of production, consumption, investment, employment, and government expenditures have been affected by the type of banking. Moreover, comparison of the two shocks indicates that the effect of these two shocks in fractional reserve banking slowly disappears and remains in the economy for a longer period of time compared to full reserve banking.