Estimation of Bank’s Credit Demand and Supply Functions in Iran

In this paper, we study the restricting factors leading to the disequilibrium condition in the Iranian market for bank’s credit using the switching regression model for the period 1353-1383 (1974-2004). The results of our study show that the real banking interest rate, real money supply, real banks reserves in central bank, and monetary base have significant relationship with credit supply. Also, the estimation of credit demand shows a positive relationship between the lag of the real deposits and credit demand. The interesting point is the insignificant relationship between the credit demand and the banking interest rate in the study period, but a high significant relationship between supply and the banking interest rate . This implies that the restricting factor in the credit market is the supply side which has always been less than the demand. An estimation of the market clearing banking interest rates in comparison with the real observed interest rates in recent years also confirms the result .