Nonlinear Reaction of Monetary Policies to the Risks of Financial Markets in Iran

In this study, using the smooth transition regression (STR) and quarterly data during the period of 1997:1-2015:3, the nonlinear monetary policy functions of the Central Bank of Iran,regarding the risk of financial markets, be estimated. The results indicated that the risk of financial markets is an important factor in regime switching of monetary policy in Iran. By passing the risk of financial markets from a threshold level, monetary policy is focused on adjusting the output gap so that the coefficient of output gap is consistent with the Taylor rule in the second regime while in the linear part (the first regime) it is in contrast to the expected coefficient. This results indicate the variability of monetary policy behavior in various financial market risk situations. However, the coefficient of inflation gap in both regimes and both scenarios is not statistically significant.