The Effects of Political Influence, Institutional Quality, and Central Bank Intervention on Banking Stability During Recession and Expansion: A Markov-Switching Approach

Naghmeh  Oveisiforodoei; Alireza Daghighiasli; Majid  Afsharirad; Narsis  Aminrashti

Authors

Naghmeh Oveisiforodoei Department of Economics, CT.C., Islamic Azad University, Tehran, Iran Author https://orcid.org/0009-0009-1982-8709
Alireza Daghighiasli Department of Economics, CT.C., Islamic Azad University, Tehran, Iran https://orcid.org/0000-0001-7805-1500
Majid Afsharirad Associate Professor, Department of Economics, Kharazmi University, Tehran, Iran Author https://orcid.org/0000-0002-6703-581X
Narsis Aminrashti Department of Economics, CT.C., Islamic Azad University, Tehran, Iran Author https://orcid.org/0000-0003-1446-2540

Keywords:

political influence, institutional quality, central bank intervention, banking stability, Markov-switching regime model

Abstract

The present study examines the effects of political influence, institutional quality, and central bank intervention on banking stability during periods of recession and expansion using a Markov-switching model. In terms of purpose, the study is applied research, while in terms of methodological nature, it is descriptive-analytical and falls within the category of ex post facto research. The study covers Iran over the period 1991–2023. The results of the Markov model estimation indicate that most coefficients are statistically significant at the 95% confidence level. According to the estimation results, the intercept coefficient is −0.72 in Regime 1 and 0.14 in Regime 2. The regime with a negative intercept represents the recession regime, whereas the regime with a positive intercept represents the expansion regime. Furthermore, the variance of the disturbance term is 5.99 in Regime 1 (recession) and 0.10 in Regime 2 (expansion). These values indicate that Regime 1, corresponding to the recessionary period, exhibits greater volatility than Regime 2, corresponding to the expansionary period. The model estimation results further show that the coefficients of foreign-exchange revenues derived from oil exports and political stability are positive during both recession and expansion. Moreover, central bank intervention has a negative effect on banking stability during recession and a positive effect on banking stability during expansion, both at the 95% confidence level.

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