Spillover Effects of the ECB’s Monetary Policy on Macroeconomic Variables in Iran: A Structural Approach

The globalization and increasing convergence of economies and markets, the expansion of international relations and the increase in global trade have raised the issue of how the monetary policy changes in large economies such as the United States and Euro area countries may affect the other countries. In this paper, we use a structural vector auto-regression (SVAR) approach to assess the spillover of ECB policy on Iran according to trade channel. Subsequently, we use the Factor Analysis to construct a synthetic index of overall Euro area monetary conditions (MCI) over the period of 2001:1-2019:4. This MCI captures both conventional and unconventional policies in Euro area countries . We find that a monetary tightening leads to a drop in Iran’s production, export, and import, peaking after 6, 5 and 6 seasons. Furthermore, the ECB policy leads to a significant depreciation and higher inflation in Iran. The results are robust than the order of variables.