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Short-run and Long-run Effects of Financial Intermediation on Economic Growth

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  • Sharif Moghaddasi , Alireza

    (Faculty of Economics, Payam-e-Noor University)

  • Mousavi Jahromi , Yeganeh

    (Faculty of Economics, Payam-e-Noor University)

Abstract

Financial intermediation in Iran's banking system is negatively affected at least in two ways. First, there are many similarities between financial intermediation and usurious activities in the common interpretation of interest-free banking law. This encourages the banks to participate in various commercial activities. Second, the price setting policies of the central bank makes investment more attractive compared to financial intermediation. In this research, the ratio of interest margin to gross income is selected as an index of financial intermediation and its importance in increasing the short-run and long-run economic growth is investigated using a dynamic linear regression model. Annual data is used and the sample includes 2005 to 2015. Using a methodology similar to Leamer (1983), a large set of control variables is chosen. The main statistical hypothesis is that financial intermediation has negative effect on economic growth. The results show that the rate of rejection of this hypothesis increases as we move from short-run to long-run regressions. In other words, the positive effect of financial intermediation on growth is a long-run phenomenon.

Suggested Citation

  • Sharif Moghaddasi , Alireza & Mousavi Jahromi , Yeganeh, 2017. "Short-run and Long-run Effects of Financial Intermediation on Economic Growth," Journal of Money and Economy, Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran, vol. 12(1), pages 89-105, January.
    • Handle: RePEc:mbr:jmonec:v:12:y:2017:i:1:p:89-105
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    More about this item

    Keywords

    Interest Margin; Indicators of Bank Soundness; Interest-Free Banking Law; Leamer’s Methodology;
    All these keywords.

    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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