Threshold Dynamics of Digital Innovation, Credit Risk, and Monetary Policy in Iran

Samaei, Mahdie; Hosseini, Seyed Shamsaldin; Abbasi, Gholamreza

Threshold Dynamics of Digital Innovation, Credit Risk, and Monetary Policy in Iran

Document Type : Original Article

Authors

Mahdie Samaei ¹

Seyed Shamsaldin Hosseini ²

Gholamreza Abbasi ³

¹ PhD Student, Department of Economics, SR.C., Islamic Azad University, Tehran, Iran.

² Associate Professor, Department of Business Economics, Faculty of Economics, Allameh Tabataba'i University, Tehran, Iran.

³ Assistant Professor, Department of Economics, Central Tehran Branch, Islamic Azad University, Tehran, Iran.

Abstract

This study investigates the threshold effects of digital innovation on the interaction between credit risk, ICT, and monetary policy effectiveness in Iran, using seasonal data covering the period 2009 to 2024. Monetary policy effectiveness is proxied by the ratio of loan balances to deposits. A robust digital innovation index is constructed via principal component analysis, incorporating key indicators such as bank account density, ATM usage, and the growing value of internet and mobile financial transactions. The empirical model incorporates several control variables, including credit risk, bank loan growth, bank size, inflation, short-term interest rates, ICT development indices, and return on assets. Preliminary diagnostic analysis, utilizing the Phillips–Perron stationarity and Johansen cointegration tests, confirms that all variables are integrated of order one and maintain long-term cointegration relationships. To specifically analyze nonlinear behavior and threshold effects, a smooth transition regression model with a logistic transition function (LSTR) is employed. Linearity tests identify the digital innovation index as the optimal transition variable, favoring the LSTR1 specification. Empirical findings demonstrate that in the nonlinear regime, digital innovation exerts a positive and statistically significant effect on monetary policy effectiveness, indicating that higher levels of innovative financial activity improve policy performance in Iran. Conversely, credit risk shows a significant negative impact; rising non-performing loans effectively weaken the monetary policy transmission mechanism. This research underscores how digital transformation can mitigate structural barriers to policy efficacy, offering crucial insights for policymakers aiming to enhance economic stability through technological integration.

Keywords

Monetary policy

Credit risk

Information and communication technology

Smart innovative activities

Digital Innovation

Subjects

Digital Transformation

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