Analyzing the Importance of Balance Sheet Channel in Monetary Transmission Mechanism in Iran

This paper aims to analyze the importance of balance sheet channel of credit approach in monetary transmission mechanism in Iran during 1989:2-2014:1. This analysis is based on a structural vector auto-regression (SVAR) model with ten variables including asset prices and the other seven-variable model excluding asset prices. These models are comparable with each other while assessing the importance of balance sheet channel. The comparison of SVAR model containing asset prices such as housing price, gold coin price, stock price and exchange rate with SVAR model excluding asset prices implies that adding asset prices to the model increases the effects of monetary policy shocks, through liquidity shocks, on output fluctuations. The findings confirms the importance of the balance sheet channel in monetary transmission mechanism. Therefore, monetary authorities should take precautions in implementing tight monetary policy due to its probable recession effect.