Financial Market Illiquidity Shocks and Dynamics of Economic Growth with Threshold Vector Autoregression Approach

Liquidity is an important indicator for the development of the capital market because it shows that a capital market with high liquidity and improved capital allocation leads to an increase in the long-term prospects of economic growth. The present research examines the relationship between financial market illiquidity impulses and economic growth dynamics in the period of 2008:4-2021:4. Amihud index (2002) has been used to extract the illiquidity index of the stock market. Using generalized Dickey-Fuller unit root (ADF) and Heggie tests, the normality of the time series has been confirmed. The results of threshold vector autoregression (TVAR) estimation show that the effect of illiquidity on inflation in high and low regimes is positive and significant, and also the effect of illiquidity on inflation is greater at lower levels of illiquidity. The effect of illiquidity on economic growth is negative. On the other hand, lack of liquidity at higher levels can cause more fluctuations in economic growth. Therefore, in the field of economic growth management, it is necessary for policymakers to pay special attention to the liquidity situation in the financial markets. In severe recession situations, reducing illiquidity in financial markets by using market stabilization funds can prevent recession and improve economic growth.