Investigating the Relationship between Borrowing from the Central Bank and Selected Internal Bank Variables in Iran: Application of the Dumitrescu-Hurlin Causality Test in Heterogeneous Panels

Document Type : Original Article

Authors

1 Assistant Professor in Economics, Department of Economics, University of Kharazmi, Corresponding Author

2 Master Student in Islamic Banking, Department of Economics, University of Kharazmi

Abstract

The purpose of this study is to examine the relationship between the two-way variable causality between the selected intra-bank variables including non-performing loans, loans and profitability with borrowing from the central bank. The purpose of this study is to investigate the relationship between two-way causality of selected intra-bank variables including non-performing loans, loans and profitability with borrowing from the central bank. In this study, the period of 2006-2016 for the 16 selected Iranian banks are used. Because of heterogeneity between banks of banking system, the method of assessing the causality relationship has regulated based on Dumitrescu-Hurlin Causality Test in Heterogeneous Panels. The results show that the variables of loans and profitability have a two-way (feedback) causality relation with borrowing from the central bank. There is a unilateral causality from non-performing loans to borrowing from the central bank and this borrowing is not the cause of non-performing loans. Therefore, stopping the banks' increasing and continuous borrowing flows is only possible by smart guidance and strict monitoring of the allocation of borrowed funds to the central bank's policy channels.

Keywords

Journal of Econometric Modelling
Volume 2, Issue 4 - Serial Number 7
September 2018
Pages 107-129

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