Examining the effects of financial stress on the uncertainty of Iran's monetary policy despite the role of government governance in recession and boom regimes

Document Type : Original Article

Authors

zahra heirani ¹

kiomars sohaili ²

SHAHRAM Fattahi ³

¹ PhD Student, Department of Economics, Faculty of Economics and Accounting, Razi University, Kermanshah, Iran

² Professor,Department of Economics, Faculty of Economics and Accounting, Razi University, Kermanshah, Iran

³ : Associate Professor/ Department of Economics/ Faculty of Economics and Accounting/ Razi University/ Kermanshah/ Iran

https://doi.org/10.22067/mfe.2024.87351.1408

Abstract

In this study, we seek to test the financial tension and uncertainty of Iran's monetary policy despite the role of government governance in recession and boom regimes. For this purpose, by using the principal component analysis (PCA) model in the first part, the financial stress index was calculated and in the second part by using the rotation model and the Markov switching (MS) regime change, the effect of the study variables during the period of 1996 to 2022 on an annual basis was investigated. Based on the obtained weights, the monetary and financial sector has the greatest effect in creating financial tension. After that, the foreign exchange sector and the stock market have the next effects. Among the variables, the free exchange rate has the most impact on financial stress in Iran's economy, followed by oil income to GDP, money to liquidity ratio, government expenditure to GDP ratio, and the real interest rate has the greatest impact on financial stress. in Iran's economy, also based on the results of Markov model estimation, for one percent increase in financial stress and oil price, respectively; 36 and 27 units, monetary policy uncertainty increases. Also, the quality of governance and the volume of business during the boom lead to a decrease of 8 and 12 units of monetary policy uncertainty.

Keywords

financial stress

monetary policy uncertainty

recession and prosperity

Markov Switching-switching model

Subjects

• Financial monetary economy

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