Monetary Policy and Asset Prices Volatility in Iran

In last 1990 decade and early 21 century due to high fluctuations in assets prices and occurring asset price bubbles, most studies in monetary economics has concentrated on the reaction of monetary policy to movement in asset prices. The purpose of this paper is to analyze the suitable reaction of monetary policy to movement in asset prices in Iran. This analysis is based on the Structural VAR class of models, which allow assessing the importance of assets prices for central bank targeting. In this article, assets prices include housing prices, stock prices, exchange rates and gold (coin) prices in period of 1989/Q2-2007/Q1.According to the results, the expansionary monetary policy (real liquidity) shocks as a significant effect on stock prices, housing prices and exchange rates. The gold prices are more affected by dollar prices fluctuations. Housing prices, gold prices, and exchange rates explain 20 percent of output (GNP) fluctuations, but stock prices do not explain output fluctuations significantly. Therefore, exchange rate, housing prices, and gold prices have important role in transferring monetary shocks to output fluctuations respectively.