Payame Noor University Economic Growth and Development Research 2228-5954 6 22 2016 03 20 Empirical Analysis of Effect of Qualitative Financial Development on Economic Growth (Case of Iran) Empirical Analysis of Effect of Qualitative Financial Development on Economic Growth (Case of Iran) 84 71 2264 FA Behnam Ebrahimi Ph.D. Student of Economics, University of Isfahan, Isfahan, Iran Mohammad Vaez Barzani Associate Professor of Economics, University of Isfahan Rahim Dallali Esfahani Professor of Economics, University of Isfahan Majid Fakhar Associate Professor of Mathematics, University of Isfahan Journal Article 2015 05 06 It’s expected, theoretically, that financial development, facilitates allocation of resources to most-productive uses and thereby fosters economic growth. Nonetheless, some opponent theories and evidences, implies that financial development may has different and to some extent antonym effects on economic growth in different situations. Specifically, qualitative financial development (financial innovations), in addition to augmenting economic efficiency, could result in regulatory arbitrage (financial institutions efforts to sidestep regulatory restrictions in order to gain more profits) which, in turn, distorts fundamental economic variables from optimum levels and thereby affects economic growth negatively. In this study, we use a semi-parametric model, based on a monetary/financial economic growth model, and data from Iran economy for the period of 1990-2012 to empirically evaluate the effect of unexpected occurrence of financial innovation on capital formation. According to results of the study, qualitative financial development would scale down capital formation and economic growth. Additionally, results reveal that regulated reserve requirements in Iran might be at their optimal level. It’s expected, theoretically, that financial development, facilitates allocation of resources to most-productive uses and thereby fosters economic growth. Nonetheless, some opponent theories and evidences, implies that financial development may has different and to some extent antonym effects on economic growth in different situations. Specifically, qualitative financial development (financial innovations), in addition to augmenting economic efficiency, could result in regulatory arbitrage (financial institutions efforts to sidestep regulatory restrictions in order to gain more profits) which, in turn, distorts fundamental economic variables from optimum levels and thereby affects economic growth negatively. In this study, we use a semi-parametric model, based on a monetary/financial economic growth model, and data from Iran economy for the period of 1990-2012 to empirically evaluate the effect of unexpected occurrence of financial innovation on capital formation. According to results of the study, qualitative financial development would scale down capital formation and economic growth. Additionally, results reveal that regulated reserve requirements in Iran might be at their optimal level. https://egdr.journals.pnu.ac.ir/article_2264_8d85c781436a81006b4101e37c8b572f.pdf