Volume 20, Issue 3 (9-2025)
J. Mon. Ec. 2025, 20(3): 435-469 |
Back to browse issues page
Download citation:
BibTeX | RIS | EndNote | Medlars | ProCite | Reference Manager | RefWorks
Send citation to:
BibTeX | RIS | EndNote | Medlars | ProCite | Reference Manager | RefWorks
Send citation to:
Safari Moghadam H, sargolzaee M, Ebrahimi sarveolia M, Dehghan dehnavi M. Assessment of Economic Capital Ratio in Iran's Economic System against Nominal and Real Shocks: A Dynamic Stochastic General Equilibrium Approach. J. Mon. Ec. 2025; 20 (3) :435-469
URL: http://jme.mbri.ac.ir/article-1-699-en.html
URL: http://jme.mbri.ac.ir/article-1-699-en.html
Hossein Safari Moghadam *1 
, Mostafa Sargolzaee2 , Mohammadhasan Ebrahimi sarveolia3 , Mohammadali Dehghan dehnavi4
, Mostafa Sargolzaee2 , Mohammadhasan Ebrahimi sarveolia3 , Mohammadali Dehghan dehnavi4
1- PhD Candidate in Finance-Banking sir.hossein.safari@gmail.com
2- Associate Professor, Allameh Tabataba’i University; mostafa.sargolzaei@atu.ac.ir
3- Associate Professor, Allameh Tabataba’i University; mh.ebrahimi@atu.ac.ir
4- Assistant Professor, Allameh Tabataba’i University; dehghandehnavi@atu.ac.ir
2- Associate Professor, Allameh Tabataba’i University; mostafa.sargolzaei@atu.ac.ir
3- Associate Professor, Allameh Tabataba’i University; mh.ebrahimi@atu.ac.ir
4- Assistant Professor, Allameh Tabataba’i University; dehghandehnavi@atu.ac.ir
Abstract: (346 Views)
This study evaluates the economic capital levels for Iranian banks and analyzes their behavior under various macroeconomic shocks by developing a Dynamic Stochastic General Equilibrium (DSGE) model that incorporates banking sector heterogeneity and macroeconomic shock transmission mechanisms. A comprehensive DSGE framework was constructed and calibrated using Iranian macroeconomic and banking data. The model implementation utilized Dynare software to analyze impulse response functions across technology, liquidity, and monetary policy shock scenarios, with particular emphasis on capital adequacy dynamics, bank bankruptcy and exit possibilities, and effects on economic welfare and financial stability.
Simulation results indicate that current capital levels of Iranian banks are insufficient for achieving financial stability and welfare maximization, requiring increases to higher levels, that exceeding Basel III regulatory minimums to maintain adequate resilience against macroeconomic volatility and prevent bank bankruptcy and exit. Technology shocks generate expansionary effects on output, consumption, and investment variables while improving economic welfare, whereas liquidity shocks create contractionary pressures reducing these key economic indicators and welfare levels. Interest rate shocks produce moderate and largely temporary effects across macroeconomic variables, with limited long-term impact on economic welfare and minimal influence on bank bankruptcy probability.
The shock analyses demonstrate the critical importance of macroeconomic conditions in bank capital management decisions, economic welfare preservation, and bank exit prevention, with liquidity shocks showing the most substantial explanatory power for capital requirement variations. The study contributes to both theoretical understanding and practical application by extending DSGE modeling to incorporate banking sector capital dynamics, bankruptcy mechanisms, and welfare effects within an emerging market context, thereby offering a more comprehensive framework for economic capital determination.
Our findings suggest that Iranian banks need to maintain higher capital levels to provide adequate stability and risk absorption capacity for Iranian banks under diverse economic shock conditions.
Keywords: Economic capital, Dynamic Stochastic General Equilibrium (DSGE), Capital adequacy ratio (CAR), Liquidity Risk, Basel regulations
Type of Study: Original Research - Theoric |
Subject:
Economics
Received: 27 May 2025 | Accepted: 23 Sep 2025 | Published: 5 Oct 2025
Received: 27 May 2025 | Accepted: 23 Sep 2025 | Published: 5 Oct 2025
References
1. Ahmadian, M. (2015). Bank run analysis in a dynamic stochastic general equilibrium model with a banking sector. Economic Policy, 14, 77-103. [In Persian]
2. Amini, A., & Neshat Haji, M. (2005). Estimation of capital stock time series in Iran's economy (1959-2002). Journal of Economics and Planning, 10(1), 53-86. [In Persian]
3. Aliman, M. (2025). Macroprudential policy transmission in the Romanian economy: Evidence from a DSGE model with a monopolistic banking sector. Journal of Eastern Europe Research in Business and Economics, Article 902956. [DOI:10.5171/2025.902956]
4. Allen, F., & Gale, D. (2000). Financial contagion. Journal of Political Economy, 108(1), 1-33. [DOI:10.1086/262109]
5. Akinci, O., & Queralto, A. (2022). Credit spreads, financial crises, and macroprudential policy. American Economic Journal: Macroeconomics, 14(2), 469-507. [DOI:10.1257/mac.20180059]
6. Almenberg, J., Andersson, M., Buncic, D., Cella, C., Giordani, P., Grodecka-Messi, A., Roszbach, K., & Söderberg, G. (2017). Appropriate capital ratios in major Swedish banks - new perspectives. Sveriges Riksbank.
7. Backus, D. K., Kehoe, P. J., & Kydland, F. E. (1992). International real business cycles. Journal of political Economy, 100(4), 745-775. [DOI:10.1086/261838]
8. Barth, J. R., & Miller, S. M. (2018). Benefits and costs of a higher bank "leverage ratio". Journal of Financial Stability, 38, 37-52. [DOI:10.1016/j.jfs.2018.07.001]
9. Basel Committee on Banking Supervision. (2010). An assessment of the long-term economic impact of stronger capital and liquidity requirements. Bank for International Settlements.
10. Basel Committee on Banking Supervision. (2017). Finalising post-crisis reforms. Bank for International Settlements. https://www.bis.org/bcbs/publ/d424.htm
11. Begenau, J. (2020). Capital requirements, risk choice, and liquidity provision in a business-cycle model. Journal of Financial Economics, 136(2), 355-378. [DOI:10.1016/j.jfineco.2019.10.004]
12. Begenau, J., & Landvoigt, T. (2022). Financial regulation in a quantitative model of the modern banking system. The Review of Economic Studies, 89(4), 1748-1784. [DOI:10.1093/restud/rdab088]
13. Bernanke, B. S., Gertler, M., & Gilchrist, S. (1999). The financial accelerator in a quantitative business cycle framework. Handbook of macroeconomics, 1, 1341-1393. [DOI:10.1016/S1574-0048(99)10034-X]
14. Birn, M., de Bandt, O., Firestone, S., Gutiérrez Girault, M., Hancock, D., Krogh, T., ... & Warusawitharana, M. (2020). The costs and benefits of bank capital-A review of the literature. Journal of Risk and Financial Management, 13(4), 74. [DOI:10.3390/jrfm13040074]
15. Brooke, M., Bush, O., Edwards, R., Ellis, J., Francis, B., Harimohan, R., Neiss, K. & Siegert, C. (2015). Measuring the macroeconomic costs and benefits of higher UK bank capital requirements. Bank of England Financial Stability Paper, 35(35), 1-55.
16. Brunnermeier, M. K. (2009). Deciphering the liquidity and credit crunch 2007-2008. Journal of Economic Perspectives, 23(1), 77-100. [DOI:10.1257/jep.23.1.77]
17. Calvo, G. A. (1983). Staggered prices in a utility-maximizing framework. Journal of Monetary Economics, 12(3), 383-398. [DOI:10.1016/0304-3932(83)90060-0]
18. Christiano, L., Motto, R., & Rostagno, M. (2014). Risk shocks. American Economic Review, 104(1), 27-65. [DOI:10.1257/aer.104.1.27]
19. Clarida, R., Galí, J., & Gertler, M. (2000). Monetary policy rules and macroeconomic stability: Evidence and some theory. Quarterly Journal of Economics, 115(1), 147-180. [DOI:10.1162/003355300554692]
20. Clerc, L., Derviz, A., Mendicino, C., Moyen, S., Nikolov, K., Stracca, L., Suarez, J., & Vardoulakis, A. (2015). Capital regulation in a macroeconomic model with three layers of default. International Journal of Central Banking, 11(3), 9-63. [DOI:10.2139/ssrn.2629093]
21. Cline, William R. (2017). The right balance for banks: Theory and evidence on optimal capital requirements. Columbia University Press.
22. Davydiuk, T. (2017). Dynamic bank capital requirements. Available at SSRN 3110800.. [DOI:10.2139/ssrn.3110800]
23. Diamond, D. W., & Dybvig, P. H. (1983). Bank runs, deposit insurance, and liquidity. Journal of Political Economy, 91(3), 401-419. [DOI:10.1086/261155]
24. Elenev, V., Landvoigt, T., & Van Nieuwerburgh, S. (2021). A macroeconomic model with financially constrained producers and intermediaries. Econometrica, 89(3), 1361-1418. [DOI:10.3982/ECTA16438]
25. Fender, I., & Lewrick, U. (2016, November 1). Adding it all up: The macroeconomic impact of Basel III and outstanding reform issues [Working paper]. SSRN. https://ssrn.com/abstract=2866137
26. Firestone, S., Lorenc, A., & Ranish, B. (2017). An empirical economic assessment of the costs and benefits of bank capital in the United States (Finance and Economics Discussion Series 2017-034). Board of Governors of the Federal Reserve System.
https://doi.org/10.17016/feds.2017.034 [DOI:10.17016/FEDS.2017.034]
27. Goodarzi Farahani, Y., Arabi, S. H., & Adeli, O. (2021). Modeling the role of banking risks in the performance of the banking system and macroeconomic variables using a DSGE approach. Econometric Modeling, 6(3), 151-181. [In Persian]
28. Gertler, M., & Karadi, P. (2011). A model of unconventional monetary policy. Journal of Monetary Economics, 58(1), 17-34. [DOI:10.1016/j.jmoneco.2010.10.004]
29. Heidari, H., & Molabahrami, A. (2017). The impact of credit shocks on dynamics of financial and macroeconomic variables using a DSGE model for the Iran economy. Quarterly Journal of Economic Research and Policies, 24(80), 85-118. [In Persian]
30. Hecker, D., Jang, H., Rubio, M., & Verona, F. (2024). Robust design of countercyclical capital buffer rules (No. 9/2024). Bank of Finland Research Discussion Papers. [DOI:10.2139/ssrn.5006256]
31. Khoshnoud, Z., & Esfandiari, M. (2017). Regulatory capital buffers and business cycles. Monetary and Banking Research Quarterly, 9(30), 625-655. [In Persian]
32. Khalili, M. A., Sargolzaei, M., Bot Shekan, M. H., & Dehghan Dehnavi, M. A. (2024). The impact of macroeconomic shocks on asset-liability management in the banking system using a dynamic stochastic general equilibrium (DSGE) approach. Economic Policy, 16(31), 117-154. [In Persian]
33. Ma, Z., Bouscayrol, A., Lhomme, W., & Cui, S. (2019). Optimal sizing of the EVT for a hybrid urban delivery truck. IFAC-PapersOnLine, 52(5), 504-509. [DOI:10.1016/j.ifacol.2019.09.080]
34. Marzban, H., Rezaalizadeh, S., Dehghan, Z., & Borhan Haghighi, A. (2010). Estimating the capital needed in the Iranian banking system to face market and credit risks. Journal of Economic Research and Policies, 26(94), 205-225. [In Persian] [DOI:10.52547/qjerp.28.94.205]
35. Mirbagherijam, M., Shahikitash, M. N., Zamanian, G. R., & Safari, A. (2015). Aggregating insurance risks in the Iranian insurance industry using detailed functions (Archimedes hierarchical detailed functions approach). Journal of Insurance Research, 4(4), 412-425. [In Persian]
36. Mendicino, C., Nikolov, K., Suarez, J., & Supera, D. (2018). Optimal dynamic capital requirements. Journal of Money, Credit and Banking, 50(6), 1271-1297. [DOI:10.1111/jmcb.12490]
37. Mendicino, C., Nikolov, K., Suarez, J., & Supera, D. (2020). Bank capital in the short and in the long run. Journal of Monetary Economics, 115, 64-79. [DOI:10.1016/j.jmoneco.2019.06.006]
38. Miles, D., Yang, J., & Marcheggiano, G. (2013). Optimal bank capital. The Economic Journal, 123(567), 1-37. [DOI:10.1111/j.1468-0297.2012.02521.x]
39. Nourahmadi, M. (2017). Application of various stress testing models for risk management. Investment Knowledge, 16, 115-136. [In Persian]
40. Nguyen, T. (2015, October). Bank capital requirements: A quantitative analysis [Preprint]. SSRN. [DOI:10.2139/ssrn.2356043]
41. Ogawa, T. (2022). Welfare implications of bank capital requirements under dynamic default decisions. Journal of Economic Dynamics and Control, 138, 104360. [DOI:10.1016/j.jedc.2022.104360]
42. Repullo, R., & Suarez, J. (2013). The procyclical effects of bank capital regulation. The Review of financial studies, 26(2), 452-490. [DOI:10.1093/rfs/hhs118]
43. Rotemberg, J. J. (1982). Sticky prices in the United States. Journal of political economy, 90(6), 1187-1211. [DOI:10.1086/261117]
44. Sabeti, M., Zomorodian, G. R., Fallah Shams, M., & Minouei, M. (2023). Provide a model for calculating the economic capital of bank loan portfolio and compare it with regulatory capital. International Journal of Finance and Managerial Accounting, 8(28), 1-16.
45. Shah Hosseini, S., & Bahrami, J. (2012). Designing a New Keynesian dynamic stochastic general equilibrium model for the Iranian economy considering the banking sector. Iranian Economic Research, 17(53), 55-83. [In Persian]
46. Smets, F., & Wouters, R. (2007). Shocks and frictions in US business cycles: A Bayesian DSGE approach. American Economic Review, 97(3), 586-606. [DOI:10.1257/aer.97.3.586]
47. Taylor, J. B. (1993). Discretion versus policy rules in practice. Carnegie-Rochester Conference Series on Public Policy, 39, 195-214. [DOI:10.1016/0167-2231(93)90009-L]
48. Tarahian, A., & Asadi, S. (2018). Extending Basel Regulatory Capital Requirement under Economic Downturns. Iranian Economic Research, 23(76), 159-184. [In Persian]
49. Tavakolian, H. (2012). A New Keynesian Phillips curve in a DSGE model for Iran. Journal of Economic Research, 47(3), 1-22. [DOI:10.22059/jte.2012.29251]
50. Van den Heuvel, S. J. (2008). The welfare cost of bank capital requirements. Journal of Monetary Economics, 55(2), 298-320. [DOI:10.1016/j.jmoneco.2007.12.001]
51. Woodford, M. (2003). Interest and Prices: Foundations of a Theory of Monetary Policy. Princeton University Press. [DOI:10.1515/9781400830169]
| Rights and permissions | |
 |
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License. |
