The Effects of Government Debt on stock market in Iran: The Necessity of Government Islamic ‎Financial Instruments Development

The government debt management policy is mainly based on capital market instruments. Under This ‎mechanism, frozen and unproductive resources used for countercyclical fiscal policies. Nevertheless, the ‎policy in Iran is mainly based on funds of the banking system and Nondepository Institutions, and capital ‎market is passively influenced by it. This could lead to inefficiencies in government debt management ‎policies as well as the volatility of the capital market. so, this study investigated direct and indirect effects ‎of various Iranian government debt on stock market by using SVAR during 2005:q2-2016:q2.‎
The results showed that effects of government debt on stock market are mostly indirectly and through ‎channel of economic variables. As real exchange rate, ratio of price of non-trade goods to trade and general ‎level of prices has a negative effect and an increase in GDP has a positive effect on real price of the shares. ‎These economic variables also significantly affected by government debts.‎‏ ‏Among types of government ‎debt, only government debt to Nondepository institutions has a direct and significant effect on real price of ‎shares. Based on these results, capital market is passively influenced by the government debt management, ‎while development of government financial instruments in framework of capital market leads to 1) ‎government to get flexible in itself debt managment and minimizes undesirable it’s outcomes, 2) it will ‎contribute to the development of the capital market,‎‏ ‏if the capital market capacity is considered at issuance ‎of government securities, and also government is disciplined in Settlement of securities.‎‏ ‏