Sajjad Mehdizadeh - Deputy of Department, Economic Research Policies Dept Central Bank

Banks non- performing loans are considered as one of the great challenges Iranian banking system has been facing over the past decade. These loans, classified underoverdue, non-performing and doubtful loans, not only distort the balance between banks sources and uses and banks soundness indicators but, with freezing some partof banks sources, also affect the financial capacity of the economy. Since this concern has various aspects, many studies have been carried out in this regard. However, thementioned studies have been mainly focused on identifying the reasons behind this phenomenon and very few have dealt with macroeconomic effects of banks nonperforming loans. This is against the backdrop of high reliance of financial sector on banks sources. Despite the expansion of the capital market and improvement indiversification of the financial instruments, banks are still the main financers of the production sector. The present study aims at introducing new aspect of banks non-performing loans as well as knowledge enhancement on the influences of this phenomenon on the economy in general. The main hypothesis of this study is as follows: Rise in banks non-performing loans, through putting pressure on banks and Central Banks balance sheets, leads to increase in liquidity and inflation and has acontractionary effect on economic growth To test this hypothesis, standardized international studies as well as Eviews Software have been used.

Macro Financial Linkages, Non-Performing Loans, Economic Growth, Feedback Approach