Evaluating the Monetary Policy Transmission Mechanism through the Stock Market in Iran Using the Structural Vector Auto Regressive (SVAR) Model

Expansion of financial markets including capital market is a key factor in increasing investment, which affects significantly the economic growth and development. Any change in monetary policy will influence real sector of economy, prices and returns on stocks. The performance of stock market is of considerable effect on macro economy, and plays substantial role in the monetary policy transmission process. In this paper, we examine the effect of monetary policy on the stock market using a five-variable structural vector auto-regressive model by applying monthly data during March 2005 to March 2013. The results suggest that the monetary policy through liquidity and loans directed to private sector is of significantly positive effect on the stock market index. As a result, expansionary monetary policy by increasing the liquidity and loans directed to the private sector improves stock market general index. In addition, changes in monetary policy through exchange rate and real interest rate have significant and negative effects on this index. The contractionary monetary policy through interest rate improves stock market index. Finally, shocks resulting from changes in exchange rate exacerbate the monetary policy in the short term, which in turn worsen the stock market index.