Examining Financial Stability and the Impact of Oil Cycles in Iran Using the NARDL Model
Keywords:
Financial Stability, Oil Price Shocks, NARDL Model, Iran JEL Classification, E44, E60, G01Abstract
Financial stability, as a key indicator of the health and resilience of the financial system, plays a vital role in ensuring sustainable economic growth, reducing systemic risks, and enhancing public trust. Focusing on the oil-based economy of Iran, this study investigates the effects of macroeconomic variables, institutional quality, and oil shocks on financial stability, and analyzes the short- and long-term dynamics of these relationships using the NARDL model. Annual time series data and dynamic multiplier coefficient tests indicate that financial stability in Iran exhibits a memory effect, and the persistence of past trends plays a decisive role in sustaining financial stability. The results show that, in the short term, financial stability is highly influenced by changes in economic growth, governance quality, monetary policies, and oil shocks. Positive and negative oil shocks initially have a reinforcing effect on the growth of the financial sector; however, these effects are temporary and are quickly replaced by adverse consequences. In the medium term, both types of oil shocks have negative effects on financial stability, with the adverse impact of negative shocks being significantly greater than the short-term benefits of positive shocks. In the long term, structural factors such as sustainable economic growth, institutional quality, and stable oil revenues are considered the main pillars of financial stability. Nevertheless, the heavy dependence of the financial system on oil and the procyclical behavior of fiscal and monetary policies cause the negative effects of oil shocks to become more persistent and riskier in the long run. The findings emphasize that designing countercyclical mechanisms, strengthening stabilization funds, enforcing strict fiscal rules, and improving governance quality are critical prerequisites for mitigating the asymmetric effects of oil shocks and achieving sustainable financial stability in Iran.
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Copyright (c) 2025 Haitham Ahmed Ghadhban (Corresponding author); Jafar Haghighat, Mohammad Reza Salmani Bishak, Hossein Asgharpur (Author)
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