Macroprudential Policy Arrangement for Achieving Financial Stability in an Oil-exporting Economy: A DSGE approach

Following the 2008 financial crisis, the application of macro-prudential policies has expanded to ensure financial stability. In addition, in most oil-exporting economies, oil revenues are an important source of fluctuations in macroeconomic variables and, therefore, calls for the use of macroeconomic stabilization policies. Considering the vulnerability of financial stability in the Iranian economy as an oil exporting country, the purpose of this study is to investigate the role of macroprudential policies in financial stability and their interaction with macroeconomic policies, in particular monetary policy. For this purpose, a macro-financial model with the approach of DSGE and with regard to the banking system, as the most important part of the financial sector in Iran's economy, has been designed. In this model, the banking system's problems, such as NPLs and toxic assets of banks, are included. The results of model simulations based on seasonal information of Iran's economy during the period of 1990-2016 indicate that the adoption of macroprudential policy and its instruments such as a loan-to-value ratio and counter-cyclical capital buffer reduce the volatility and vulnerability of the financial sector. Moreover, with regards to the institutional relationship between macroprudential and monetary policy, the research findings show that the cooperation of these two institutions increases the effectiveness of macroeconomic policies and improves social welfare as well.