Volume 19, Issue 2 (6-2024)
J. Mon. Ec. 2024, 19(2): 229-248 |
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Hashemi Sanjani A. Review to The Asymmetric Effect of Monetary Policy on Boom and Bust Cycles in the Iranian Stock Market. J. Mon. Ec. 2024; 19 (2) : 5
URL: http://jme.mbri.ac.ir/article-1-683-en.html
URL: http://jme.mbri.ac.ir/article-1-683-en.html
MA in Theoretical EconomicsMA in Theoretical Economics
Abstract: (954 Views)
This study seeks to rigorously assess the relationship between Iran’s stock market index and monetary policy within the framework of the Markov Switching Vector Autoregressive (MS-VAR) model. The MS-VAR methodology is particularly well-suited for capturing regime-dependent dynamics and structural shifts in macroeconomic and financial time series. For this purpose, quarterly data spanning from Spring 2009 to Fall 2023 have been employed. All estimations were conducted using EViews 12 and OX Metrics 7 software. As a preliminary step, the Hodrick-Prescott filter was applied to differentiate between two distinct market regimes. Combined with a univariate Markov Switching model, this approach enabled the identification of cyclical fluctuations in the stock market, distinguishing bull from bear market phases. The results indicate that Regime 1 (bear market) demonstrates greater persistence and stability relative to Regime 2 (bull market), suggesting asymmetric market dynamics. Subsequently, the study investigates the effects of monetary policy—proxied by the interbank market rate and liquidity growth—on the growth of the stock market index within the MS-VAR framework. The findings suggest that monetary policy has different effects during bull and bear market phases. The stock index exhibits a prompt and asymmetric response to changes in both the interbank market rate and liquidity growth. Specifically, in both bull and bear market regimes, an increase in the interbank interest rate exerts a contractionary effect on stock index growth, with a more pronounced negative impact observed during periods of market recession. Moreover, liquidity growth consistently contributes positively to stock index growth across both regimes, with a more pronounced effect under bull market conditions. Variance decomposition analysis further reveals that, in both regimes, shocks to the stock index itself account for the largest proportion of its fluctuations. Nonetheless, the relative importance of monetary policy instruments varies by regime: In both expansionary and recessionary phases of the stock market, shocks stemming from the interbank market rate play a more prominent role in explaining stock index volatility compared to liquidity shocks. Finally, the presence of nonlinear interactions among the variables is statistically validated based on the Likelihood Ratio (LR) test.
Article number: 5
Type of Study: Original Research - Theoric |
Subject:
Monetary Economics
Received: 9 Mar 2025 | Accepted: 25 May 2025 | Published: 29 Jun 2025
Received: 9 Mar 2025 | Accepted: 25 May 2025 | Published: 29 Jun 2025
References
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26. Gali, J., & Gambetti, L. (2015). The effects of monetary policy on stock market bubbles: Some evidence. American Economic Journal: Macroeconomics, 7(1), 233-257. doi:10.1257/mac.20130232
27. Gertler, M., & Karadi, P. (2015). Monetary policy surprises, credit costs, and economic activity. American Economic Journal: Macroeconomics, 7(1), 44-76. doi:10.1257/mac.20130329
28. Johnson, S., & Tsai, C. (2010). The effects of monetary policy on stock returns: A regime-switching approach. Journal of Financial Stability, 6(3), 152-160. doi:10.1016/j.jfs.2010.01.002
29. Li,X. (2025). The Impact of National Monetary Policy on Stock Price Increases. Journal of Applied Economics and Policy Studies,15,72-76.
30. Nakamura, E., & Steinsson, J. (2018). High-frequency identification of monetary non-neutrality: The information effect. The Quarterly Journal of Economics, 133(3), 1283-1330. doi:10.1093/qje/qjy004
31. Patelis, A. D. (1997). Stock return predictability and the role of monetary policy. Journal of Finance, 52(5), 1951-1972. doi:10.1111/j.1540-6261.1997.tb01120.x
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33. Rigobon, R., & Sack, B. (2004). The impact of monetary policy on asset prices. Journal of Monetary Economics, 51(8), 1553-1575. doi:10.1016/j.jmoneco.2004.02.004
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