Investigating the Effect of Passive Monetary Policy on Stock Price Index

In recent years, the effect of financial markets and especially the stock market as one of the factors of financing investment plans and projects are important.The effects of prosperity and recession of these markets on the country's economy are also considered. In the implementation of monetary policy, in fact, the existence of asymmetric effects doubles the need to pay attention to the performance of monetary shocks and accuracy in formulating and implementing policies in any economy. And policymakers in their medium- and long-term planning not only pay attention to macroeconomic goals, including the level of real output and inflation, Asymmetry considers the effects of monetary shocks on real and nominal variables in the economy as endogenous. In other words, it is considered to be influenced by factors such as the size of positive and negative monetary shocks, various inflationary conditions, and the prevalence of recession or boom in the economy.

Interest rates in the Iranian economy are constant over the years, we can not use the Taylor rule to estimate the effects of monetary policy. Therefore, we modeled the monetary policy process by using the McCallum rule of the monetary base as a representative of monetary policy. Then, by extracting monetary shocks, we interpret its effects on the economy. Finally, we used the Markov Dynamic Switching Regression (MSDR) model to estimate the effects of monetary policy shocks on stock prices. The MSDR model enables the rapid evolution of heterogeneous time series in different states. In addition, to determine the dynamic relationship between monetary policy shocks and stock prices, special attention is paid to time-varying parameters in the MSDR model.The application of monetary policy with the instrument of monetary base growth on the variables of output gap, inflation gap, exchange rate changes with quarterly data from 2005 to 2019 and using the  Maccallum Rule is investigated.Then the effect of monetary shocks on the stock price index is analyzed based on the Markov Switching Model.

By using monetary policy with monetary base tools, in the first period, the shock to the monetary base has a positive effect on the monetary base, from the second period to several periods, it has negative effects, and finally, over time, the effects of monetary shock on the positive monetary base and it is very minor.The output gap versus the monetary shock in the first period has a positive effect and the second and third periods have a reverse effect, then a positive and increasing effect, and over time the degree of impact of the output gap becomes little with the application of monetary policy. Inflation has negative and decreasing effects against changes in the monetary base in all periods, which will reach zero over time, and the effects of the monetary base on inflation over time will be very small. By implementing monetary policy with the basic monetary instrument, the exchange rate in the first periods has negative effects. Then it will have a small decreasing trend over time.Therefore, there are effects of monetary policy implementation in the early periods on the variables, and over time, the effects of floating the monetary base on other variables become minor and insignificant.Markov's test of the rotational model confirms that the Iranian stock market has followed a passive stock market relative to changes in the monetary base over the period under study. In the first and second regimes, changes in the output gap increase the stock price index. In both regimes, the output gap coefficients are significant and smaller than one.In regime one, increasing the inflation gap increases the stock price index and is statistically significant. In this regime, the reaction of the Iranian stock market to inflation is high compared to other variables, which indicates that in the recession period, the index against inflation, the index The stock price will also have a positive and increasing response, and shareholders will benefit from this price growth due to the recessionary conditions of the economy, and finally the growth of the stock price index. In regime two, the stock price index decreases as inflation increases. It can be said that if inflation expectations are combined with rumors of prosperity in a certain sector of the economy, shareholders may withdraw their capital from the stock market and invest in another field. Increasing the supply of the total stock price index decreases.The results explain that the dealing of monetary policy and monetary shocks in each time period does not have a consistent behavior and the same effect on the stock price index.The application of monetary policy in a powerful way does not affect the stock price index. The findings also indicate that after one or at most three seasons, a turnaround occurs in the state of Iran's economy. And the period between prosperity and recession and politics is constantly rotating between active and passive. Therefore, according to the results obtained in the Iranian economy, we do not see the stability and long-term sustainability of a prosperity or recession regime.

According to the results obtained in the Iranian economy in the period under review, we do not see the stability and long-term durability of a prosperity or recession regime.