Short-term and Long-run Effects of Income Inequality on Banking Crisis in Iran; ARDL Approach

Document Type : پژوهشی

Authors

• Mohammad Sharif Karimi ¹
• maryam heidarian ²
• Masoud Cheshmaghil ³

¹ Assistant Professor of Economics, Razi University

² Ph.D. in Public Sector Economics, Razi University

³ Ph.D. student in Economics, Sistan and Baluchestan University

https://doi.org/10.22067/mfe.2020.39556

Abstract

Extended abstract
1- INTRODUCTION
Banks in Iran, like other developing countries, have a more sensitive role in financing due to the limited activities of other financial institutions. Therefore, the occurrence of a crisis in this sector can jeopardize financial stability. One of the most important signs of a banking crisis is the sudden influx of depositors into banks to withdraw their deposits. Due to government support, the Iranian banking sector has never faced a sudden demand from depositors. However, under the influence of state ownership, the country's banks increased the volume of their loans from the mid-2001s, which led to a high volume of overdue debts, and the Iranian banking system, from the first quarter of 2005 to the second quarter of 2009, is constantly facing crisis.
2- THEORETICAL FRAMEWORK
Given that along with the money market as a tool for financing firms, the currency market is also active, so in a situation where due to high fluctuations in the recent market is an unsafe situation and full of uncertainty in the business environment. It happens that the credit risk of firms increases, and in these circumstances, firms that use credit and bank facilities as a source of financing for the development of production units may have difficulty in repaying these facilities and in As a result, due to the inability of firms to fulfill their obligations, the balance between assets and liabilities of banks is upset and the banking crisis is prepared.
3- METHODOLOGY
To investigate the relationship between income inequality and the banking crisis in Iran during the period 1980-2019, the following model, inspired by Ray and Kim's study, has been used. In this logarithm model, the ratio of domestic credit to adjusted GDP (real domestic credit) is considered as a dependent variable. The famous Gini index has also been used to show the degree of inequality. Explanatory variables of the model, in addition to the Gini index, include the logarithm of GDP, the logarithm of the volume of liquidity, the logarithm of real gross capital, the logarithm of the ratio of public debt to GDP, the logarithm of the real exchange rate and the output gap. In this study, to investigate the relationship between variables in the Iranian economy, the self-return model with wide interruption and boundary tests have been used.
4- RESULTS & DISCUSSION
The existence of a short-run relationship between the independent variables of GDP, real exchange rate and output gap with the dependent variable of the ratio of domestic credit to GDP is confirmed. In other words, in the short run, with increase in GDP and the output gap of its potential, the amount of domestic credit to production will increase, leading to a banking crisis.
In the long run, there is a relationship between all the independent variables of the model and the dependent variable. The results of the relationship between the Gini coefficient and the banking crisis index also show a positive and significant relationship that due to increasing income inequalities and people's demand for facilities, the volume of loans granted increases and debts can be expected to increase, so this issue it will lead to the escalation of the banking crisis in the country.
5- CONCLUSIONS & SUGGESTIONS
The results of the model estimate in the short run indicate that there is no significant relationship between income inequality and the banking crisis, but in the long run this relationship has shown a positive effect, so that with a one percent increase in the Gini coefficient, 1.39 percent increase in the ratio of domestic credit to production has led to a banking crisis.
Regarding other variables, it can be said that with increase of production, investment, production gap, banking crisis has intensified, but with increase of exchange rate and liquidity, this effect will have a decreasing trend.

Keywords

• Income Inequality
• Banking Crisis
• Auto Regression Model with Border Distribution Intervals
• Iran

References

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  • توسعه بازارهای مالی و نابرابری درآمدی در ایران
  • Development of financial and income inequality markets in Iran
  • توسعه بازارهای نابرابری مالی و درآمدی در ایران
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  • Development of financial markets and income inequality in Iran
  • توسعه بازارهای مالی و نابرابری درآمدی در ایران
  • Development of financial and income inequality markets in Iran
  • توسعه بازارهای نابرابری مالی و درآمدی در ایران
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