This study employs a calibrated Dynamic Stochastic General Equilibrium (DSGE) model to compare endogenous liquidity creation and its allocation in Iran, Armenia, and Azerbaijan over 2005–2024. It significantly contributes by introducing a structural Liquidity Distribution Indicator (LDI), measuring the share of bank-created liquidity allocated to firm lending. Countries are selected based on similar Liquidity Creation Intensity (LCI), defined as the ratio of central bank borrowing to total deposits. The model features a representative household and bank with financial frictions to analyze how balance sheet liquidity allocation affects the transmission of a –1% lending rate shock, interpreted as a relaxation of credit conditions before and after COVID-19. Calibrated to country-specific financial structures and solved using a fully nonlinear routine, the model generates impulse responses from nonlinear transition dynamics. Results show that before COVID-19, banks in Iran and Armenia allocated a relatively small share of liquidity to firm lending, with Azerbaijan displaying a similar pattern driven by state-dominated intermediation. Although post-COVID liquidity support temporarily increased lending shares, structural banking features continued to constrain effective monetary transmission. Overall, interest rate policy alone appears insufficient to mitigate risks from concentrated liquidity allocation; strengthening credit allocation mechanisms and banking intermediation is essential for macro-financial stability.
Mohammadi, Z. , Bakhshi, R. and Vaez Barzani, M. (2026). Endogenous Liquidity Creation in Bank Centric Economies: A DSGE Analysis of Iran, Azerbaijan, and Armenia. Iranian Journal of Economic Studies, (), 119-167. doi: 10.22099/ijes.2026.55887.2112
MLA
Mohammadi, Z. , , Bakhshi, R. , and Vaez Barzani, M. . "Endogenous Liquidity Creation in Bank Centric Economies: A DSGE Analysis of Iran, Azerbaijan, and Armenia", Iranian Journal of Economic Studies, , , 2026, 119-167. doi: 10.22099/ijes.2026.55887.2112
HARVARD
Mohammadi, Z., Bakhshi, R., Vaez Barzani, M. (2026). 'Endogenous Liquidity Creation in Bank Centric Economies: A DSGE Analysis of Iran, Azerbaijan, and Armenia', Iranian Journal of Economic Studies, (), pp. 119-167. doi: 10.22099/ijes.2026.55887.2112
CHICAGO
Z. Mohammadi , R. Bakhshi and M. Vaez Barzani, "Endogenous Liquidity Creation in Bank Centric Economies: A DSGE Analysis of Iran, Azerbaijan, and Armenia," Iranian Journal of Economic Studies, (2026): 119-167, doi: 10.22099/ijes.2026.55887.2112
VANCOUVER
Mohammadi, Z., Bakhshi, R., Vaez Barzani, M. Endogenous Liquidity Creation in Bank Centric Economies: A DSGE Analysis of Iran, Azerbaijan, and Armenia. Iranian Journal of Economic Studies, 2026; (): 119-167. doi: 10.22099/ijes.2026.55887.2112
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