Effect of Exchange Rate Change on Macroeconomic Variables Through Banking System: Approach of Macro-Econometric Model

Abstract

Banking system is one the important sectors of economy and as vital institution of money market, plays a very significant role. Also, due to the nature of the banking system performance, the activities of banks have a close relationship with the exchange rate changes. This paper tries to assess the effects of exchange rate variations on macroeconomic variables via the banking system using a macro-econometric model and approach of bounding ARDL during 1973-2017. The results indicated that an increase in the exchange rate through non-performance loans and long-term deposits will led to decreased credit providing by the banking system. On the other hand, an increase in the exchange rate through the net open position and banks' capital account had a positive impact on banks' credit provision. However, the negative impact of a change in the non-performance loans and long-term deposits is stronger than the positive impact of the net open position. In addition, the decreasing trend of providing credit by banking system had a negative effect on investment. Finally, an increase in the exchange rate causes a decrease in the long-term deposits and the money multiplier which has a negative effect on liquidity and price level. An increase in the exchange rate through the capacity utilitization rate had a negative impact on GDP. Also an increase in the exchange rate led to increased liquidity and price level.