Household portfolio channel of credit shocks transmission: The Case of Iran

Abstract

In this study, we use a Dynamic Stochastic General Equilibrium (DSGE) model to investigate the household portfolio channel of monetary and credit shocks transmission in Iran. In this regard, we developed a canonical New Keynesian DSGE model with financial and banking sectors. The model is estimated by Bayesian method for the period 1990-2012. The result showed that the current and expected prices of financial and physical assets affected their optimal proportions in household portfolio. Second, banking sector had a significant impact on the household portfolio composition and also on the real sector variables. More specifically, a positive deposit rate shock reduced the proportions of financial and physical assets in household portfolio and increased marginal cost and inflation. This shock decreased investment and output. Third, a positive shock on stock price had negative effects on demand for other assets in household portfolio but these effects were discharged rapidly. Moreover, the housing price shock had similar effects on demand for mentioned assets but the effects were discharged slowly. The results emphasized the role of credit, banking and assets markets sectors in financial fluctuation, business cycles and monetary transmission in Iran.