Evaluation of the effect of financial policies on Capital Market investment in financial friction

This study evaluates the effect of financial policies on stock market investment in financial friction conditions. For this purpose, two models were designed based on financial policies (taxes and government expenditures) and in the period from 1991 to 2017, the short-term dynamic relationship, long-term state and error correction of the models were estimated with the Auto Regressive Distributed Lag (ARDL). The financial friction index is used in this study based on the definition of the interest rate gap (the difference between on the lending interest rate and the deposit interest rate). The results show that in terms of financial friction, fiscal policy had a significant and negative impact on the first model (tax based) and in the second model (based on government spending) a positive and significant effect on the total stock price index. This result is in line with Keynesian view. The financial friction index also had a negative effect on the total stock price index in both models. However, since taxation directly affects corporate liquidity, therefore, in fiscal policy based on tax revenues, the effect of fiscal friction on the dependent variable was more dependent on government spending than fiscal policy. The results of estimating the other variables in the models were that GDP based on Keynesian theory, oil revenues based on support theory and exchange rate in flow-oriented models had a significant and positive effect on the total stock price index.