The impact of financial stability on monetary policy in developing countries: A nonlinear model

Gudarzi Farahani, Yazdan; Morsali Arzanagh, Zoleikha; Abasi, Ebrahim

doi:10.22051/ieda.2024.46906.1413

The impact of financial stability on monetary policy in developing countries: A nonlinear model

Document Type : Research Paper

Authors

¹ Assistant Professor, Department of Islamic Economics, Faculty of Economic and Administrative Sciences, Qom University,Qom, Iran.

² Department of Accounting and Management, Islamic Azad University, Karaj Branch, Karaj, Iran

³ Alzahra University

10.22051/ieda.2024.46906.1413

Abstract

Financial stability for various reasons, including financial freedom, which is the basis of the interaction between the perception of value and risk, which leads to different effects on policy makers' goals on economic variables. One of the parts of influencing financial stability is the monetary policy, which affects the market of financial assets through the price mechanism. The purpose of this paper was to investigate the effect of the financial stability on monetary policy based on the non-linear model in developing countries. In this study, the Nonlinear Autoregressive Distributed Lags (NARDL) model and statistical data for the period 2000-2023 for developing countries including Iran were used. In order to investigate the effect of financial stability on monetary policy, a non-linear model was used. The results obtained from this study indicated that the variable of inflation rate had a positive effect on monetary policy in the short and long term, but the exchange rate, production and financial stability have a negative effect on the monetary policy. In addition to this model, it was observed in the estimated nonlinear model that the positive and negative values caused by the financial stability shock had asymmetric effects on monetary policy in developing countries.

Keywords