The Impact of Monetary Policy on the Fragility of the Money Market in the Iranian Economy

Document Type : Original Article


1 PhD. Candidate in Economics, Faculty of Management and Economics, The Islamic Azad University, Science and Research Branch, Tehran, Iran.

2 Professor of Economics, Ohio University, Athens, USA.

3 Professor of Economics, Faculty of Management and Economics, The Islamic Azad University, Science and Research Branch, Tehran, Iran

4 Professor of Economics, Faculty of Economics, University of Tehran, Tehran, Iran



After the 2008 financial crisis, it became clear that monetary policy has been one of the main reasons for the vulnerability and instability of financial markets. This article examines the dynamics of the effect of monetary policy on the fragility of the money market during 1991:Q1-2017-Q4 in Iran. First, an index for the fragility of the Iranian money market is extracted and then the effect of monetary policy on this index is investigated. To show the performance of the monetary policy, three variables of the weighted real interest rates, monetary base growth rate, and excess reserves rate have been used as monetary policy instruments. The results show that an increase in the real interest rate reduces the volatility of the money market, but the other two instruments do not affect the volatility of the money market. The results of the Forecast Error Variance Decomposition also show that the share of monetary instruments in explaining the changes in money market fragility in the short and medium-term is small and less than ten percent, although the effect of the real interest rate is higher. As a result, it can be concluded that financial and quasi-financial dominance of the government, and the freezing of a significant amount of commercial bank assets, monetary policy has no significant effect on the fragility of the money market.


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