Nonlinear effects of interest rates on the total stock market index in the Iranian economy Markov switching Approach

Interaction between money market and capital market is one of the important issues in Iran’s economy especially during recent years. One of the instruments of money market is real interest rate by which the Central Bank performs expansionary and contractionary monetary policies. Considering the currents during two recent years in capital market and money market and the effort of monetary investors to reinforce capital market by means of f money market, this study also investigates the effect of monetary policy on the efficiency of stock market. Therefore, Markov-Switching Model and quarterly data of Iran’s economy during 2009q1 to 2021q2 have been used. The results revealed that the efficiency of stock market has reacted to real interest rate in every regime with different degrees and in both regimes there was a negative relationship between real interest rate and the efficiency of stock market which signals investors to reduce efficiency rate of money market or real interest rate to reinforce capital market.