The Effect of the Financial Health of the Banking System on Inflation Stability in High-Inflation Economies (with an Emphasis on the Moderating Role of Monetary Policy)

Articles in Press

Document Type : Original Article

Author

Rafi Hassani Moghaddam

Assistant Professor of Economics, Damghan University

https://doi.org/10.22067/mfe.2026.100444.1725

Abstract

This study examines the effect of banking system financial soundness on inflation stability, with an emphasis on the moderating role of monetary policy, in 10 high-inflation countries over the period 2000–2025. The main objective is to investigate whether the financial soundness of banks affects inflation stability and whether the magnitude of this effect is influenced by the stance of monetary policy. For this purpose, inflation stability is considered the dependent variable, while the financial soundness index, monetary policy index, and the interaction between these two variables are considered the main explanatory variables. In addition, the exchange rate, government size, fiscal deficit, economic growth, trade openness, and domestic credit to the private sector are included as control variables. Given the presence of heterogeneity, outliers, and severe inflationary shocks in the countries under investigation, the model is estimated using robust regression. The results show that the financial soundness index, monetary policy, and the interaction term between financial soundness and monetary policy are statistically significant at the 5% level. In addition, the exchange rate, government size, fiscal deficit, economic growth, and private sector credit have significant effects, whereas the effect of trade openness is statistically insignificant. The findings indicate that the effect of financial soundness on inflation stability depends on monetary policy conditions.

Keywords

Banking Financial Soundness

Inflation Stability

Monetary Policy

Robust Regression

High-Inflation Countries

Subjects

• Financial monetary economy

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