The Estimation of Capital Market Dynamisms in Iran's Real Sector Economy in a DSGE Model

Financial markets especially capital market can make strong connections with other parts of the economy. After 2007/2008 financial crisis and global extensive economic recession, the economists show interest in the financial markets function again. The purpose of this study is to design and estimate a Dynamic Stochastic General Equilibrium new Keynesian model with Stock market dynamism to investigate the stock market channel effectiveness mechanism on macroeconomics variables. So an open DSGE model containing households, firms, banks, government and central bank was designed and after log-linearization, then the model’s parameters were estimated using quarterly data 1996:3-2013:2 and experimental studies results. The model estimation using Bayesian method results show the effect of stock market on macroeconomic variables but due to the small size of Iran’s capital market the effect is meaningful according to size but the duration is not strong or stable. After all, it’s preferred that Iran’s central bank focus on total index growth rate rather than total index deviations in reaction to a shock in capital market in order to decrease the effects of financial mechanisms on real and nominal macroeconomic variables.