The Dependence of Stock Market Bubbles on Monetary Policy Shocks: TVP-VAR Approach

Document Type : Research Article

Authors

1 Associate Professor, Department of Economic, Facility of Economic, Allameh Tabataba’i University, Tehran, Iran

2 Ph.D. Student in Economics, Department of Economic, Facility of Economic, Allameh Tabataba’i University, Tehran, Iran.

https://dx.doi.org/10.22084/aes.2022.25540.3387

Abstract

The occurrence of a price bubble in the financial sector, especially the stock market and the possibility of its collapse, causes uncertainty about the financial market and ultimately the outflow of capital from it. Since the occurrence of crisis in these markets can affect other sectors of the economy as well, the policymakers plan and implement appropriate monetary and fiscal policies to deal with the crisis and respond in a timely and correct manner to prevent its destructive effects. Considering that Iranian financial markets, like other countries, are not safe from this phenomenon, in this research, by using Iranian quarterly data of some variables including interest rate, gross domestic product, gross domestic product deflator, dividends, consumer price index, oil price, exchange rate and stock price index, for the period 2003:1 to 2019:3 and Bayesian inference, the TVP-VAR model (time-varying parameters vector Auto regressive) is estimated and the impulse - response functions of variables is driven, and the dependence of stock market bubbles on monetary policy shocks are investigated. The results show that a number of research variables, such as interest rates, gross domestic product, gross domestic product deflator, dividends, stock price and it’s fundamental component, have had almost stable patterns over time, and their response to monetary policy shock has not changed much and only in the case of stock prices, we can see that its negative reaction to the monetary policy shock has decreased over time but the reaction of bubbly component of stock price to the monetary policy shock has not been stable over time and in recent years of the sample, the reaction of bubbly component, end up increasing  from the beginning.

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References

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Journal of Applied Economics Studies in Iran
Volume 13, Issue 49
May 2024
Pages 41-71

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