Document Type : Research Paper


1 Assistant Professor of Islamic Economics, Faculty of Economics and Administrative Sciences, University of Qom, Qom, Iran

2 Associate Professor of Islamic Economics, Faculty of Economics and Administrative Sciences, University of Qom, Qom, Iran


 This study aims to investigate the relationship between currency crises and fluctuations in banking credits in Iran. Utilizing a time-varying coefficients approach spanning from 1989 to 2022, alongside economic boom and recession indicators, the analysis assesses the impact of currency crisis occurrences on banking credit cycles. The currency crisis index, based on a dummy variable, and the credit cycle index, derived from banking credit booms and busts, are examined alongside the economic cycle, gauged by production fluctuations using intermediate filters. Findings suggest that currency crises influence the occurrence of credit cycles and production facility cycles, while shocks stemming from economic cycles exacerbate currency crises and credit cycles within the banking system. Given the bidirectional relationship observed between the currency crisis index and credit cycles, policymakers are advised to exercise caution in implementing drastic measures during economic fluctuations and credit cycles. Prudent management of currency markets can mitigate the adverse effects of currency crises on economic variables.


Financial crises have profound and far-reaching implications, encompassing economic, political, and social spheres. They exact a heavy toll on society, manifesting in reduced welfare, heightened unemployment, and diminished public trust. Given their extensive repercussions across various sectors, financial crises have garnered considerable attention from economic policymakers. Among the diverse forms they take, currency crises stand out as particularly significant. These crises, marked by sudden depreciation or robust intervention by monetary authorities to bolster national currency values through foreign exchange reserve sales, exert widespread influence across the economy. They precipitate pressures on consumers, producers, and central banks, disrupting market dynamics for other assets and impinging on monetary policy frameworks. Moreover, they adversely impact credit allocation within the banking system, underscoring their multifaceted ramifications.
The main question investigated in this article pertains to the interplay between currency crises and credit cycles during the economic upswings and downturns in Iran. Given the nuanced nature of credit cycle delineation, coupled with the fluctuating dynamics of economic expansions and contractions, the vector autoregression (VAR) approach with time-varying coefficients has been employed to examine the evolving dynamics of this relationship spanning the period from 1989 to 2022. This methodological choice is motivated by its ability to yield more realistic findings, accounting for the temporal variability of coefficients and the dynamic interrelationships among variables. This contrasts with traditional time series models and conventional VAR frameworks, thereby enabling the formulation of more informed policy recommendations.

Methods and Material

In this study, credit cycles and currency crises spanning the period from 1989 to 2022 were extracted using the Cristiano and Fitzgerald filters. The relationship between these components and economic expansions and contractions was then explored. Additionally, the dynamic interplay among these variables was assessed using the vector autoregression method with time-varying coefficients (TVP-VAR). The study incorporates four primary variables: the currency crisis index, credit cycle, economic boom and recession periods, and liquidity growth. To compute the currency crisis index, a virtual variable was employed. The data utilized in this research were sourced from the Central Bank's database and statistical quarterly reports.

Results and Discussion

The findings from the TVP-VAR model reveal several significant dynamics. Initially, in response to a shock from the credit cycle, liquidity growth displays a positive reaction, with the impact dissipating over the long term. Conversely, the currency crisis initially reacts negatively to the credit cycle shock but eventually exhibits a positive response, indicating that the creation of the credit cycle contributes to the occurrence of currency crises. The economic cycle, when shocked by the credit cycle, responds negatively. On the other hand, when the credit cycle is shocked by the currency crisis, it initially reacts positively, followed by a subsequent negative reaction, with the long-term effect dissipating. Liquidity growth, in response to the currency crisis shock, demonstrates a positive reaction. Regarding the economic cycle, its response to the currency crisis shock is initially negative, then positive, and eventually negative again, suggesting that currency crises give rise to periods of economic expansion and contraction. In another aspect, the shock from the credit cycle prompts a positive reaction in liquidity growth, while the currency crisis variable responds negatively to the credit cycle shock. Initially, the credit cycle variable reacts positively to the credit cycle shock, but over time, it turns negative, with the impact fading in the long run. Finally, in response to the shock of liquidity growth, the currency crisis variable shows a positive reaction, the economic cycle reacts positively, and the credit cycle also responds positively, with the effect of the shock diminishing over time..
 Figure 1. IRF diagram in TVP-VAR model format


The findings from this study highlight the adverse impact of currency crises on the economic cycle, leading to periods of recession. Conversely, economic downturns can exacerbate currency crises. Based on these results, it is advisable for monetary authorities and central banks to refrain from implementing contractionary policies, particularly in foreign exchange policies and credit restrictions, during economic downturns. Instead, they should expedite the process of foreign exchange allocation to economic enterprises for purchasing production inputs, thereby fostering an environment conducive to improving production and stimulating economic growth. Furthermore, during credit crises, commercial banks are encouraged to increase credit limits for commercial enterprises and streamline the loan repayment process in the micro-finance sector. These measures aim to prevent the economy from slipping into recession and promote sustainable economic development.


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