Program and Development Research

Program and Development Research

Examining the consequences of government financing (issuance of financial bonds) on the Banking Credit to Private Sector

Document Type : Original Article

Authors
maryam heidarian 1
Shoaib Moradi Deh Charaghi 2
1 assistant professor, Member of the academic staff of the Research Institute of Economic Affairs, Ministry of Economic Affairs and Finance, Tehran, Iran, (Corresponding author).
2 PhD student in Monetary Economics, Department of Economics, Faculty of Economics and Accounting, Razi University, Kermanshah, Iran.
10.22034/pbr.2024.210258
Abstract
In Iran's economy, the government primarily addresses its budget deficit by creating a monetary base, which leads to monetary inflation. The adverse effects of this method are well known. One alternative solution to the budget deficit is the use of financial bonds. This research investigates the impact of issuing financial bonds on the loans provided by banks to the private sector, a major source of economic financing.
Using the Markov switching auto regression approach, the study covers the period from 1994 to 2022 and focuses on Iran's economy. The results show that during the first regime (21 years), the government's internal borrowing from commercial banks through the issuance of financial bonds reduced the volume of bank credits to the private sector. However, in the second regime (8 years), the issuance of government financial bonds had a positive and significant effect on bank credits.
Therefore, it can be concluded that during consecutive years of recession, the government's budget deficit and the increased issuance of financial bonds led to a decrease in banks' financial resources. As a result, these resources were diverted towards purchasing bonds instead of providing loans to the private sector, ultimately reducing private sector investment in the economy.
Keywords
government financing
issuance of financial bonds
facilities
autoregressive Markov switching method

Subjects

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