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

Document Type : Research Article

Authors

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

Abstract

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.

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References

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Journal of Applied Economics Studies in Iran
Volume 12, Issue 45
April 2023
Pages 9-45

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