Oil shocks, financial stability and implementing macroeconomics and macro‐prudential policies in an oil‐exporting economy

Abstract

Since the financial crisis of 2007-2008, macro-prudential policies have been widely used to achieve financial stability. Moreover, for most oil-exporting economies, oil revenues are an essential source of fluctuations in macroeconomic variables, which necessitate the adoption of macroeconomic stabilization policies. By constructing a macro-financial DSGE model, this paper examines the role of macro-prudential policies in financial stability and how they interact with macroeconomic policies in an oil-exporting economy.Applying quarterly data of the economy of Iran during 1990-2017, the results show that macroeconomic stabilization policies are not considered as sufficient condition for financial stability. The implementation of macro-prudential instruments is necessary to reduce financial instability. Moreover, the results indicate that the cooperation of the macro-prudential and monetary authorities increases the effectiveness of the macro-prudential and monetary policies.