This study investigates the relation between bounced checks and economic growth through the banking credit risk channel by estimation of a simultaneous equation system with panel data for 31 Iranian provinces covers the years from 2011 to 2015. For this purpose, after identifying determinants of the bounced checks, the relations of this variable with the non-performing loans, banking loans and economic growth are evaluated. The results confirm the positive relationship between the bounced checks to GDP ratio and the prices index, whereas the impacts of output deviation from trend and the index of enforcement of laws on the bounced checks are negative. In times of stagflation, with the decreasing possibility of defaults, the bounced checks tend to grow. Also, with the development of legal and judicial system in the country with a view to boosting institutional and governance quality, the number of bounced checks decreases on the scale of economic activities. On the other hand, the number of bounced checks after fixing the control variables will lead to an increase of non-performing loans and the bank credit risk. Meanwhile the impact of bank loans on economic growth through the productivity channel is meaningful and positive. Therefore, in the Iranian economy the increase of bounced checks through the channel of bank loaning power will have a negative influence on economic growth.
