Analysis of Liquidity Dynamics in the Iranian Economy (1981-2021): Transition from Fiscal Dominance to the Central Role of the Banking System

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Member of the Scientific Council of the Qadr Center for Applied Economic and Social Research

10.30471/iee.2025.10815.2497

Abstract

This article investigates the factors influencing liquidity growth in Iran's economy during the period of 1981 to 2021. The research findings, contrary to popular belief, indicate that over the past three decades, the banking system has acted as the primary driver of liquidity growth, rather than the government budget deficit. In the 1980s, the government played a dominant role in liquidity growth. However, analyzing trends in subsequent decades (1990s, 2000s, and 2010s) reveals the emergence of the banking system as the main and dominant driver of liquidity growth. Specifically, the banking system's share of liquidity growth has increased from 50 percent in the 1980s to 92 percent in the 2010s. Furthermore, the article's results challenge the hypothesis of the effectiveness of mandated lending and the dominance of fiscal policies over monetary policies, suggesting a need to reconsider these assumptions. Finally, given the central role of the banking system in creating liquidity, this article emphasizes the necessity of implementing effective supervision and control over this system, particularly private banks, in order to curb the phenomenon of liquidity. It concludes by offering comprehensive policy recommendations in this regard.

Keywords

Journal of Economic Essays: an Islamic Approach

Articles in Press, Accepted Manuscript
Available Online from 16 July 2025

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