The Impact of Monetary Policy Shock on the Stock Price Bubble (TVP-VAR Model )

Document Type : RESEARCH PAPER

Authors

1 Department of Economics, Faculty of Economics, Allameh Tabataba'i University, Tehran, Iran

2 Department of Economics, Allameh Tabataba'i University, Tehran, Iran

Abstract

The emergence of the bubble phenomenon in financial markets and its possible collapse causes a kind of uncertainty, and causes capital to leave productive markets. Duo to these issues, policymakers seek to plan and implement appropriate policies to deal with the crisis and respond promptly and correctly in these situations to reduce or prevent the adverse effects are due to it. Considering that the Iranian stock market, like other financial markets in other countries, is not immune from this phenomenon, in this study by using the TVP-VAR model and extracting the impulse- response functions and using seasonal data of Iran for variables like interest rate, gross domestic product, gross domestic product deflator, consumer price index, total stock price index and dividend per share, in the period 1382: 1 to 1398: 3, the effect of the relative size of stock price bubble component on the effectiveness of monetary policy on the reduction or eliminating the stock price bubble component is simulated and the results show that when the size of the bubble component is small, compared to the fundamental component, the application of contractionary monetary policy can be effective in reducing the price bubble, but when the price bubble is large, This contractionary monetary policy causes a larger component of the price bubble and makes the situation worse. Furthermore The results show that some variables like interest rate, gross domestic product, gross domestic product deflator, dividend per share and fundamental component of price have had almost stable patterns, but the stock price response and its bubble component to the policy shock have not been stable over time and their negative response to the monetary policy shock, have been decreased over time and in recent years of sample, the stock price response and its bubble component, end up increasing from the first period.

Keywords

References

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