Abstract

One of the problems that are been facing the Iranian banking system, especially during the 1380s and 1390s, is the financial friction that is evident in the form of an increase in nonperforming loans, government debt accumulation, and fixed assets. The existence of These financial frictions, on the one hand, leads to a reduction in the efficiency of the credit market, a reduction in the power of bank crediting, and, as a result, firms’ exposure to credit constraint. On the other hand, these frictions cause to decrease in the effect of expansionary monetary policy on the power of the banking system to provide credits. This paper examined the effectiveness of expanding monetary policy tools on providing credit ability of banking system in the presence and absence of financial frictions within a structural macro-econometric model framework for the period of 1967-2015. The results show that the effectiveness of the expanding monetary policy tools on the credit-providing ability of the banking system in the absence of financial frictions is on average nearly 60 percent higher than when there are frictions. Therefore, it can be said that the effectiveness of expanding monetary policy tools on the increase in the credit-providing ability of the banking system is reduced by almost 60 percent in the presence of financial frictions.