The Calculation of Asset Price Index and Analysis of Its Effect on Inflation

The assets market which comprises the money, exchange, capital, financial and real assets markets can play very important role in the economy, vis-a-vis, formation of inflationary expectations, absorption of disequilibrium and shocks inflicted on the real sector, and at the same time financing the activities rendered in the real side of the economy. However, if assets prices contain the required information regarding the leading indicators of the economy, i-e inflation or economic growth, they should be incorporated in the information package of policymakers. Therefore, considering the importance of asset market in economics, derivation of an index which could reflect the general price trend of this market, is deemed to be absolutely essential. It is obvious that, among the multivariate methods, the principal component analysis is a statistical technique, which is usually used for analyzing the group of correlated variables related to one or more modules like socioeconomic indices, job satisfaction, health, personal credit, and political situation of a country, etc. In this article, an attempt is made, first to review the relevant literature about the relationship between the assets market and the real sector and after exploring the plausible reasons for the keen interests of policy markers in asset prices, then the required analysis for application of indexing method of principal components approach to economics has been conducted, and subsequently, by utilizing this method, we have constructed the asset price index of Iranian economy. However the results of study indicate that, the impact of the fiscal and real variables on each other, with respect to the dynamic interactions of markets, may cause shifting the recession in one market to lead to liquidity transfer and boom in other markets. Moreover, the results of variance decomposition show that the share of impulses of fiscal and real assets on changes of the variance of inflation is significant.