Assessing the Macroeconomic Impact of Government Expenditure in the Full-Reserve Banking: DSGE Approach

Document Type : Research Article


1 PhD student in Economics, Department of Economics, Faculty of Economics and Political Sciences, Shahid Beheshti University, Tehran, Iran

2 Assistant Professor, Department of Economics, Faculty of Economics and Political Sciences, Shahid Beheshti University, Tehran, Iran

3 Associate Professor, Department of Economics, Faculty of Economics, Allameh Tabatabaei University, Tehran, Iran


The purpose of this study is the investigating of the government spending effects on the important macroeconomic variables in the Iranian economy in terms of full reserve banking. To achieve this goal, a stochastic dynamic general equilibrium model of the new Keynesians is designed by considering the full reserve banking system (FRB) and in view of the Iranian economy realities and then examines the effects of the impulse under two financing scenarios -with and without money creation. After the determining of  the model input values and estimating the parameters by using quarterly data of Iran’s economy during the period of 1991-2020 by the Bayesian estimation method, the results of the model variables simulation indicate the validation of the model in describing the fluctuations of the Iran’s economy. Examining the dynamics of the model shows that the response of the important macroeconomic variables such as production, inflation, consumption and money supply to the impulse of government spending are very similar under the two scenarios. in general, money creation under full reserve banking system causes the reducing of the government debt. The effectivity of the monetary policy increases because by increasing of the deposits, the reserves of the central bank increase by the same amount, or in other words, one hundred present reserves for deposits occurs, which in turn leads to a decrease in money without support or Money supply. Theoretical and empirical results also confirm that under one hundred present reserves banking, monetization of the government budget deficit, in addition to a significant reduction in the government debt, leads to a further reduction in the inflation, increasing of the consumption and the boom in the production. In other words, the FRB generate more capacity for fiscal policy.


Main Subjects

- افشون، حبیب­اله؛ هادیان، ابراهیم؛ صمدی، علی‌حسین؛ و صدرایی، احمد، (1398). «بررسی اثر مخارج عمومی بر متغیرهای کلان اقتصادی تحت قاعده بودجه متوازن: رهیافت DSGE». پژوهش­ها و سیاست­های اقتصادی، 92: 132-89.
- صمصامی، حسین؛ داودی، پرویز؛ و جهانی‌گوران، جلال، (1393). «هزینه­های خلق پول در نظام بانک‌داری  متعارف و راه­کارهای تأمین مالی اسلامی». پژوهشنامه اقتصادی، 14 (55): 103-71.
- هادیان، مهدی؛ و درگاهی، حسن، (1399). «ارزیابی آثار کلان اقتصادی مخارج جاری و عمرانی دولت و شیوه تامین مالی آن در ایران: رهیافت DSGE». نظریه­های کاربردی، 1: 272-241.
- خلاصه تحولات اقتصادی کشور، سال­های مختلف، بانک مرکزی جمهوری اسلامی ایران.
- عادلی، محمدحسین؛ سلیمی­فر، مصـطفی؛ توکلیـان، حسـین؛ و اشـرفی، یکتا، (1397). «بررسی اثر مخارج دولت بر رفاه در ایران: کاربرد DSGE». پژوهش­ها و سیاست­های اقتصادی، 85: 55-7.
- سبحانی، حسن؛ و درودیان، حسین، (1395). «ارزیابی توجیه­پذیری خلق پول به وسیله سیستم بانکی در نظام بانک‌داری  اسلامی». اقتصاد اسلامی، 16(64): 31-54.
- محمودی‌نیا، داود؛ برهانی، لیلا؛ و ستاری؛ امید، (1398). «بررسی وضعیت پایای اقتصاد ایران در شرایط بانک‌داری  ذخیره کامل». سیاست‌گذاری اقتصادی، 11(22).
- Al-Jarhi, M., (2004). Remedy for banking crises: What Chicago and Islam have in common: A comment.
- Adeli, M. H.; Salimifar, M.; Tavaklian, H. & Ashrafi, Y., (2019). “A Study of the Effect of Government Expenditures on Welfare in Iran: Application of DSGE”. Journal of Economic Research and Policy, 85: 55-7. (In Persian).
- Afshon, H.; Hadian, E.; Samadi, A. & Sadraei, A., (2020). “Investigating the effect of public spending on macroeconomic variables under the balanced budget rule: DSGE approach”. Scientific Journal of Economic Research and Policy, 92: 132-89. (In Persian).
- Allen, F.; Carletti, E. & Gale, D., (2014). “Money, financial stability and efficiency”. Journal of Economic Theory, 149: 100-127.
- Andersen, S. A., (2016). The Origins and Nature of Scandinavian Central Banking. Palgrave Macmillan.
- Agénor, P. R.; Alper, K. & Da Silva, L. A. P., (2014). “Sudden floods, macroprudential regulation and stability in an open economy”. Journal of International Money and Finance, 48: 68-100.
- Benigno, P., (2019). Private money creation, liquidity crises, and government interventions. Journal of Monetary Economics, 106: 42–58.
- Benes, J. & Kumhof, M., (2012). The Chicago Plan Revisited. IMF Working Paper, WP/12/202.
- Borhani, L.; Mahmoudinia, D. & Sattari, O., (2019). “Study of the stable situation of Iran's economy in terms of full reserve banking”. Scientific Journal of Economic Policy, 12 (22) (In Persian).
- Burriel, P.; Fernández-Villaverde, J. & Rubio-Ramírez, J. F., (2010). “MEDEA: A DSGE Model for the Spanish Economy”. SERIEs, 1(1-2): 175-243.
- Blinder, A. S., (2004). The Quiet Revolution Central Banking Goes Modern. Yale University Press.
- Bordo, M. D., (2007). A Brief History of Central Banks. Federal Reserve Bank of Cleveland.
- Calvo, G. A., (1983), “Staggered Prices in a Utility-maximizing Framework”. Journal of monetary Economics, 12(3): 383-398.
- Cecchetti, S. G. & Schoenholtz, K. L., (2015). Money, Banking, and Financial Markets. Fourth Edition, McGraw-Hill Education.
- Central Bank of the Islamic Republic of Iran (2021). (In Persian).
- Ciocca, P., (2015). Stabilising Capitalism. A Greater Role for Central Banks, Palgrave Macmillan.
- Chari, V. V. & Phelan, C., (2014). “On the social usefulness of fractional reserve banking”. Journal of Monetary Economics, 65: 1-13
- Chiarella, C.; Flaschel, P.; Hartmann, F. & Proaño, C. R., (2012). “Stock market booms, endogenous credit creation and the implications of broad and narrow banking for macroeconomic stability”. Journal of Economic Behavior & Organization, 83(3): 410-423.
- Di Muzio, T. & Robbins, R. H., (2017). An Anthropology of Money; A Critical Introduction. Routledge. 
- Dixhoorn, C. V., (2013). Full Reserve Banking: An analysis of four monetary reform plans. working paper, The sustainable finance lab, Utrecht, Netherlands.
- Dimand, R. W., (1993). “100 Percent Money: Irving Fisher and Banking Reform in the 1930s”. History of Economic Ideas: 59-76.
- Fisher, I., (1934c). The 100% System and Bank Credit. American Banker: 29-30.
- Fisher, I., (1935). “The Debt-Deflation Theory of Great Depressions”. Economietrica: 337-357.
- Fisher, I., (1936). “100% Money and Public Debt”. Economic Forum: 406-420.
- Friedman. M., (1969). The Optimum Quantity of Money and Other Essays, Chicago, Aldine: 81-93.
- Gerali, A.; Neri, S.; Sessa, L. & Signoretti, F. M., (2010). “Credit and Banking in a DSGE Model of the Euro Area”. Journal of Money, Credit and Banking, 42(s1): 107-141.
- Gertler, M. & Karadi, P., (2010). A Model of Unconventional Monetary Policy. Working Paper, New York University.
- Gedeon, S. J., (1985). “The Post Keynesian Theory of Money: A Summary and an Eastern European Example”. Journal of Post Keynesian Economics, 8: 208-221.
- Godley, W. & Lavoie, M., (2012). Monetary Economics: An Integrated Approach to Credit, Money, Income, Production and Wealth. Second Edition [First Edition published in 2006]. Basingstoke: Palgrave Macmillan.
- Hayek, F., (1935). “Collectiv economic plan”. Economietrica: 102-228.
- Hadian, M. & Dargahi, H., (2020). “Evaluation of the macroeconomic effects of current and construction expenditures of the government and its financing method in Iran: DSGE approach”. Applied Theory Quarterly, 1: 272-241. (In Persian).
- Jordà, Ò.; Schularick, M. & Taylor, A., (2015). “Betting the house”. Journal of International Economics, 96 (Supplement 1): S2–S18.
- Jordà, Ò.; Schularick, M. & Taylor, A., (2014). “The Great Mortgaging: Housing Finance, Crises, and Business Cycles”. Federal Reserve Bank of San Francisco Working Paper: 2014-23.
- Jordà, Ò.; Schularick, M. & Taylor, A., (2011). “Financial Crises, Credit Booms and External Imbalances: 140 Years of Lessons”. IMF Economic Review, 59 (2): 340–378.
- Jackson, A. & Dyson, B., (2012). Modernizing Money: Why our Monetary System is Broken and How it can be Fixed. London: Positive Money.
- Krainer, R. E., (2017). “Economic Stability under Alternative Banking Systems: Theory and Policy”. Journal of Financial Stability.
- Khatat, M. El-H., (2016). Monetary Policy in the Presence of Islamic Banking. International Monetary Fund (IMF), Working Paper.
- Kotlikoff, L. J., (2010). Jimmy Stewart is Dead: Ending the World's Ongoing Financial Plague with Limited Purpose Banking. Hoboken, N. J.: Wiley.
- Lainà, P., (2015). “Proposals for full-reserve banking: a historical survey from David Ricardo to Martin Wolf”. Economic Thought, 4(2): 1-19.
- Lainà, P., (2017). Seignorage from Full-Reserve Banking.
- Laina, P., (2018). “Money creation under full-reserve banking: a stock–flow consistent model”. Cambridge Journal of Economics, 1 of 31.
-  Mahmoudinia, D.; Borhani, L. & Sattari, O., (2020). “A survey of the steadiness of Iran's economy under full-reserve banking”. Journal of Economic Policy, 11(22): 191-225. (In Persian).
- Moenjak, T., (2014). Central Banking Theory and Practice in Sustaining Monetary and Financial Stability. John Wiley & Sons Singapore Pte. Ltd.
- Mcleay, M. et al., (2014). “Money creation in the modern economy”. Quarterly Bulletin 2014 Q1, Bank of England.
- Prescott, E. C. &Wessel, R., (2016). Monetary Policy With 100 Percent Reserve Banking: An Exploration. Cambridge, Ma 02138 July 2016.
- Phillips, R. J., (1992). Credit markets and narrow banking.
- Riccardo, B., (1994). “Between Wicksell and Hayek Mises Theory of Money and Credit Revisited”. American Journal of Economics and Sociology, 532-573.
- Ronnie, J. Ph., (1994). The Chicago Plan and New Deal Banking Reform. New York, M.E. Sharping.
- Tavakolian, H. & Ghiaie, H., (2019). Optimal Inflation Targeting in a Dual-Exchange Rate Oil Economy, TH´eorie Economique, Mod´elisation et Applications. Universit´e de Cergy-Pontoise.
- Samsami, H.; Davoudi, P. & Jahani Goran, J., (2014). “Costs of money creation in conventional banking system and Islamic financing solutions”. Economic Research Quarterly, 14 (55): 71-103. (In Persian).
- Sobhani, H. & Drodian, H., (2016). “Evaluation of the justification of money creation by the banking system in the Islamic banking system”. Islamic economy, 16(64): 31-54. (In Persian).
- Simons, H., (1948). “Review: Lauchlin Currie, The Supply and Control of Money in The United States”. Journal of Political Economiy, 63: 555-558.
- Sigurjonsson, F., (2015). Monetary Reform: A better Monetary System for Iceland. Iceland: Report Commissioned by the Prime Minister of Iceland.
- Schularick, M. & Taylor, A., (2012). “Credit Booms Gone Bust: Monetary Policy, Leverage Cycles, and Financial Crises, 1870–2008”. American Economic Review, 102 (2): 1029–1061.
- Ugolini, S., (2017). The Evolution of Central Banking: Theory and History. Palgrave Macmillan.
- Uhlig, H., (1999). “A Toolkit for Analyzing Nonlinear Dynamic Rational Expectations Models Easily”. Computational Methods for the Study of Dynamic Economics: 150-200.
- Von Mises, L., (1949). Human Action: A Treatise on Economics. New Haven, CT: Yale University Press.
- Werner, R., (2016). “A lost century in economics: Three theories of banking and the conclusive evidence”. International Review of Financial Analysis, 46: 361-379.
- Wicksell, K., (1907). “The Influence of The Rate of Interest on Price”. The Economic Journal: 213-220.