The Impact of Macro Economic Shocks on Asset and Liability Management in the Banking System; A DSGE Approach

Document Type : Research Paper

Authors

1 Allame Tabatabai University

2 Assistant Professor in Department of Finance and Banking, Management and Accounting Faculty, Allameh Tabatabai University, Tehran, Iran

10.22034/epj.2024.20579.2491

Abstract

This article employs a dynamic stochastic general equilibrium (DSGE) framework to investigate ‎the multifaceted repercussions of macroeconomic shocks on asset and liability management ‎within the banking system. The core objective of this study revolves around a theoretical model ‎that elucidates the dynamics of crucial variables in bank asset and liability management when ‎confronted with four distinct types of shocks: monetary policy, productivity, public ‎expenditures, and investment. Subsequently, this conceptual model is subjected to ‎comprehensive simulations aimed at dissecting the intricate ways in which these shocks influence ‎various facets of the Iranian economic and banking system, encompassing bank capital, loans, ‎deposits, interbank defaults, and interbank rates, both in the short term and the long term. The ‎findings of this research reveal the effect of diverse shocks on the asset and liability management ‎of banks. These effects are exquisitely attuned to the duration and magnitude of the respective ‎shocks. Specifically, a positive productivity shock is observed to engender a long-term surge in ‎loans and deposits, while a positive monetary policy shock engenders a contraction in policy rates ‎and a simultaneous upswing in interbank liquidity. Moreover, a positive shock in public ‎expenditures ushers in an expansionary influence on bank lending, potentially leading to a ‎decrease in interest rates over the long term.These findings illuminate the intricate mechanisms ‎through which macroeconomic shocks permeate the banking system, underscoring their ‎consequential implications for the regulatory and supervisory frameworks governing banks. As ‎such, this study extends a more profound comprehension of the intricate interplay between ‎shocks and asset and liability management within the banking sector, thereby informing ‎policymakers, regulators, and practitioners in their endeavors to craft resilient and adaptive ‎strategies for mitigating the impacts of macroeconomic fluctuations. In sum, the insights gleaned ‎from this research significantly enhance our collective understanding of the complex dynamics ‎within the banking system, facilitating more robust decision-making processes and enhancing ‎financial stability.‎

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The Journal of Economic Policy

Articles in Press, Accepted Manuscript
Available Online from 13 February 2024

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