A survey of the steadiness of Iran's economy under full-reserve banking

Document Type : Research Paper

Authors

1 Assistant Professor of Economics, Valiasr University of Rafsanjan

2 Master of Economics, Valiasr University of Rafsanjan

Abstract

Since long, fractional reserve banking has played a role in creating private money and caused economic problems such as depression, inflation, increase of public debts, and so on. Currently, full-reserve banking proposed as a solution to make reforms is supported by many economists. This study presents a stock-flow consistent model of full-reserve banking for Iran's economy. Money creation at the time of government budget deficit under full-reserve banking can provide almost zero inflation and full employment. The amount of government debts has remained unchanged, but the wealth of households has increased. The amount of bank deposits and loans has also increased in these conditions, and the liquidity of banks has been at its optimum level. This study also included the oil sector (model innovation) to examine the process of allocating oil resources to the national development under full-reserve banking. It is found that an increase in the current expenditures will increase the allocation of oil resources to capital expenditure and reduce the resources of the development funds. However, in a new steady state, all the oil revenues move toward the national development funds and, in this case, the government experiences a small budget surplus that will persistent.

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References

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The Journal of Economic Policy
Volume 11, Issue 22
March 2020
Pages 191-225

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