Analysis the effects of monetary policy in Iran's economy with the existence of shadow banking, using dynamic stochastic general equilibrium method

Since the financial crisis in 2007, shadow banking has been recognized as the cause of the crisis in the world. This article empirically analysis the relationship between shadow banking and the implementation of monetary policy in Iran by using the dynamic stochastic general equilibrium method. This study shows that shadow banking is growing rapidly in Iran, and due to lack of activity within the framework of Central Bank regulations, it can reduce the effectiveness of monetary policies. In order to investigate the role of shadow banking, the effects of monetary policy shock have been investigated in two different scenarios. In both cases of expansionary monetary policy or contraction monetary policy, with the scenario of considering shadow banking in the economy, disruptive effects on growth and inflation variables were observed. So that with the application of expansionary monetary policy, the production changes after a period become negative, and with the application of contraction monetary policy, taking shadow banking into account, the amount of reduction in production and the general level of prices occurs to a lesser extent, and in fact The effects of the contraction policy have been reduced. In the model after tightening monetary policy, regular banks reduce the amount of loans on their balance sheet while shadow banks increase lending. This reduces the real effects of the shock, but at the same time shadow banks amplify the reaction of key variables to real shocks and can make the financial sector and the whole economy more unstable and take the economy out of the path of stability and developmentExtended AbstractIntroductionAt the forefront of macroeconomic research on the causes of the Great Financial Crisis (GFC) was and still is the usage of dynamic stochastic general equilibrium (DSGE) models. To capture the nonlinearities of the GFC, these models were enriched with a variety of financial frictions. This paper focuses on a special subset of these frictions, the shadow banking system. We provide a structured review of the strand of literature that considers shadow banking in DSGE setups and draw particular attention to the modeling approach as well as impact of shadow banking. Our analysis allows the following conclusions: firstly, models featuring shadow banking are better able to simulate realistic movements in the business cycle that are of comparable magnitude to the GFC. Secondly, the models consider amplification channels between the fin