The Effect of Central Bank Policies (Interbank Interest Rate) on Capital Market Performance with the Dynamic Stochastic General Equilibrium Model

Morsali Arzanagh, Zoleikha; Mehrara, Mohsen; Gudarzi Farahani, Yazdan

doi:10.48308/jfmp.2024.105459

The Effect of Central Bank Policies (Interbank Interest Rate) on Capital Market Performance with the Dynamic Stochastic General Equilibrium Model

Document Type : Original Article

Authors

¹ Ph.D. Candidate, Department of Economics, Aras International Campos of University of Tehran, Iran, Iran

² Professor, Department of Economics, University of Tehran, Tehran, Iran.

³ Assistant Prof., Department of Islamic Economics, University of Qom, Qom.

10.48308/jfmp.2024.105459

Abstract

Purpose: The stock market plays a multidimensional role in monetary policy decisions. On the other hand, the performance of the capital market is influenced by monetary policy innovations through various channels, as well as the value of corporate shares, which reflects the extent of economic developments and, in turn, indicates the power of monetary policies in guiding political decisions. In view of this, capital market efficiency not only reflects monetary policy decisions and the effects of the economy, but also provides a reflection for the Central Bank on the expectations of the private sector about the future and, of course, other key macroeconomic variables. The aim of this article is to examine the impact of central bank policies on capital market performance using the dynamic stochastic general equilibrium model approach..
Method: In this study, statistical data from the period 1368-1402 based on the frequency of seasonal data has been used. The method used in this study is to solve the Dynamic Stochastic General Equilibrium (DSGE) model. This dynamic stochastic general equilibrium model presents a new Keynesian approach under the hypothesis of sticky prices and monopolistic competition conditions for the Iranian economy. In general equilibrium models, the economic structure is extracted based on the optimization of economic units. Based on this type of modeling, it is assumed that there are three different economic units in the economy, each of which seeks to optimize its own goal; these three units are the consumer (household), the producer (firm), and the economic policymaker (which can be the government or the central bank). From the optimization of the behavior of these three economic units, macroeconomic structural equations are obtained. In general, from the optimization of the behavior of the household, the aggregate demand function is obtained, from the optimization of the behavior of the firm, the aggregate supply function is obtained, and from the optimization of the behavior of the policymaker, the policy function is obtained. The use of the term general equilibrium is because the consumption and production sectors are examined simultaneously and their decisions are specified and determined in a single structure. This modeling method has the advantage that the effects of variables on each other can be observed simultaneously and the model shocks can be well modeled and their effects can be seen.
Findings: The results of the monetary policy shock in this study showed that due to the existence of imperfections in financial markets, it leads to volatility and instability in the capital market. One of the shocks designed in this study is a change in the interest rate related to the central bank's overdraft, which accordingly, with an increase in the interest rate and the adjustment cost related to the failure to comply with capital adequacy and the bank's overdraft from the central bank, has led to a decrease in performance and efficiency in the capital market.
Conclusion: According to the results obtained, it is suggested that capital market activists pay special attention to the monetary policies of the central bank. Also, considering that changes in asset prices are considered as a reaction to changes in monetary policy and it is attributed to the immediate reaction of the stock market to changes in interest rates, this variable should be considered for decision-making. In addition, the use of the capital market and its mechanism of influence on the economy can lead to a decrease in the inflation rate and an increase in government income through adjustments in inflation expectations and individual money demand, and move the economy towards a systemic economy.

Keywords

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