Asset Pricing and the Role of Monetary Policy based on Inflation Targeting

Document Type : Original Article


1 Assistant Professor of Economics, Faculty of Economics, Kharazmi University, Tehran, Iran

2 MA in Financial Management, Faculty of Administrative Sciences and Economics, University of Isfahan, Isfahan, Iran



The purpose of this paper is to provide an empirical framework for assessing monetary policy shocks in two Iranian stock and housing markets in high and low volatility regimes. For this purpose, using Markov Switching model, both stock and housing markets are divided into two regimes and probabilities associated with each regime. It should be noted that the Markov Switching Modeling Approach is used to identify two distinct environments for each market where the environment is referred to as high fluctuations and low fluctuation environments. Then, using Probit model, the effects of monetary policy on the probability of housing and stock markets in a regime with high fluctuations are investigated. For this purpose, the monthly data on money base, the stock market and housing stock returns, inflation rates and dollar during the period of 2010-2016 were used. The results show that money base and higher inflation rates will keep stock and housing stock in a highly volatile regime. The rise in dollar also reduces the probability of the two above-mentioned markets fluctuating in the regime. The findings are very useful for policy makers, because the results provide a degree of predictive power that can be used in monetary policy decisions.


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