The Realationship between Monetary Policy and Financial Condition Index in Iran (MSIHA Approach)

Document Type : Original Article

Authors

• Zahra Haeri Nasab
• Qmars Sohaili

Department of Economics, Razi University of Kermanshah, Kermanshah, Iran

10.22067/ijaaf.2025.45183.1440

Abstract

Monetary policy is one of the critical economic policies that affect the macro variables of every country. The Financial Condition Index (FCI) is one of the composite variables affected by monetary policy. This study aimed to measure the effect of monetary policy through different channels on Iran's FCI. The FCI was first calculated using time series data from 1991-2023 and the Principal Component Approach econometric method. The effect of monetary policy on the country's FCI using the Markov-switching (MSIHA (2) AR (2)) model was calculated and estimated. The results of the estimation of the Markov-switching model indicate that the studied period can be divided into two regimes of zero and one. These results are consistent with research hypotheses and theoretical foundations, which is not far from expected considering the economic conditions.

Keywords

• Condition Index
• Financial Markov-Switching
• Monetary Policy
• Principal Component Approach

Main Subjects

• Finance

---

References

1. Arbabian, Sh. and Azizi, Z., (2019). Analysis of impulses affecting housing prices in Iran, Quarterly Journal of Financial and Economic Policies,7(27), pp. 105-132. (In Persian).
2. Atrkar, S. and Mahboobi, M. (2016). Extraction of financial condition index for Iran, Economic Modeling Research Quarterly, 24, 1-22. (In Persian).
3. Bernanke, B. S., Gertler, M. and Gilchrist, S. (1994). The financial accelerator and the flight to quality, 78(1), pp. 1-15. https://doi.org/10.2307/2109844
4. Boivin, J. and Giannoni, M. P. (2002). Assessing changes in the monetary transmission mechanism: A VAR approach. Economic Policy Review, 8(1), pp. 1-22.
5. Dadgar Y. and Nazari R. (2008). Evaluation of Financial Development Indicators in Iran. Conference: International Conference on the Development of the Financial System in Iran (with a Financial Innovation Approach), Tehran, Iran. (In Persian).
6. Dornbusch, R. and Fischer, S. (1980). Exchange rates and the current account. The American Economic Review, 70(5), pp. 960-971.
7. Eickmeier, S. and Hofmann, B. (2013). Monetary policy, housing booms, and financial (im) balances. Macroeconomic dynamics, 17(4), pp. 830-860.
8. Gauthier, C., Graham, C. and Liu, Y. (2004). Financial conditions indexes for Canada (No. 2004-22). Bank of Canada. Working Paper, Ontario, Canada
9. Gómez, E., Murcia, A. and Zamudio, N. (2011). Financial conditions index: Early and leading indicator for Colombia. Ensayos sobre Politica Economica, 29(66), pp. 174-221.
10. Hatzius, J., and Watson, M. (2010). Financial Conditions Indexes a Fresh Look after the Financial Crisis. Journal of monetary economics, 120(2), pp. 1125-1145.
11. Ho, G. and Lu, Y. (2013). A financial conditions index for Poland. International Monetary Fund, 122(3), pp. 1440-1454.
12. Johansen, S. and Juselius, K. (1990). Maximum likelihood estimation and inference on cointegration—with applications to the demand for money. Oxford Bulletin of Economics and Statistics, 52(2), pp. 169-210.
13. Manning, M. J. F. and Shamloo, M. (2015). A financial conditions index for Greece. International Monetary Fund. Working paper, New Hampshire, United States
14. Mayes, D. G. and Virén, M. (2001). Financial conditions indexes. University of Auckland Business School, Working Paper No. 17/2001, Available at SSRN: http://dx.doi.org/10.2139/ssrn.315489
15. Mehregan, A. (2014). Democratic Values, Islamic Principles, and Political Democracy. In Religion, Religiosity, and Democratic Values (pp. 14-73). Brill, Leiden, Netherlands. https://doi.org/10.1163/9789004274464_003
16. Mohseni, H., and Pahlevani, M., and Shahikitash, M., (2018). Analyzing the role of unconventional monetary policy using financial conditions index: Bayesian vector autoregression approach, Quarterly Journal of Economics and Modeling, 10(37), pp. 211-240. (In Persian).
17. Montagnoli, A. and Napolitano, O. (2005). Financial Condition Index and interest rate settings: a comparative analysis. Istituto di Studi Economici Working Paper, 8, p. 2005.
18. Obstfeld, M. and Rogoff, K. (1995). The intertemporal approach to the current account. Handbook of international economics, 3, pp. 1731-1799.
19. Polat, A., Shahbaz, M., Rehman, I. U. and Satti, S. L. (2015). Revisiting linkages between financial development, trade openness and economic growth in South Africa: Fresh evidence from combined cointegration test. Quality & Quantity, 49, pp. 785-803. https://doi.org/10.1007/s11135-014-0023-x
20. Sharifi Nia, F., and Haghighat, J. (2023). The Impact of Monetary Policy Shocks from the Exchange Rate Channel on the Health of Iran's Banking System, Quarterly Monetary & Financial Economics, Vol, 30, pp. 99-134. https://doi.org/10.22067/mfe.2023.78781.1234
21. Swiston, M. A. (2008). A US financial conditions index: putting credit where credit is due. International Monetary Fund. Working Paper, New Hampshire, United States
22. Taghizadeh, H., and Zamanian, Gh., and Harati, J., (2016). Calculation of indicators of monetary and financial conditions using the method of analysis of basic components for Iran's economy, Applied economic studies of Iran, 5(19), pp. 29-57. (In Persian). https://doi.org/10.22084/aes.2016.1597
23. Taylor, John, B. (1993). Macroeconomic Policy in a World Economy from Econometric Design to Practical Operation. New Journal, 123(1), pp. 1122-1135.
24. Tsai, I. C. (2013). The asymmetric impacts of monetary policy on housing prices: A viewpoint of housing price rigidity. Economic Modelling, 31, pp. 405-413. https://doi.org/10.1016/j.econmod.2012.12.012
25. Viren, M. (2013). Is the housing allowance shifted to rental prices?. Empirical Economics, 44, pp. 1497-1518.
26. Vonen, N. H. (2011). A financial conditions index for Norway (No. 07/2011). Staff Memo. Norges Bank, Oslo. https://hdl.handle.net/11250/2507329
27. Zareinejad S., Soheili K. and Fattahi Sh. (2022). Transmission channels of monetary policy effects on inflation in the Iranian economy using the Markov switching self-explanatory vector approach. Monetary and Financial Economics (Knowledge and Development), 28(21), pp. 87-104. (In Persian).