IDEAS home Printed from https://ideas.repec.org/a/eee/jpolmo/v45y2023i5p935-956.html
   My bibliography  Save this article

Financial markets, inflation and growth: The impact of monetary policy under different political structures

Author

Listed:
  • Sadeghi, Abdorasoul
  • Tayebi, Seyed Komail
  • Roudari, Soheil

Abstract

This study assesses the likely effects of different political structures on economic growth by the effects of interest rate on the linkage between financial markets. For this aim, we chose two developing economies with different governance structures, Iran and Argentina. There is a political structure in Iran influenced by religion, whereas Argentina’s political structure does not deal with religion. We first assess the causality amongst the financial markets of the stock market, bank deposits, and the foreign currency market (CM). Then, the effects of the markets and inflation on economic growth are assessed using Granger-causality tests and Markov-switching models. The results show that there are bidirectional causalities between the financial markets in Iran, and unidirectional causalities in Argentina. The markets affect economic growth in the both countries. For Iran, the monetary policy instrument of interest rate indicates no causalities to the markets, whereas there are strong causalities from interest rate to the markets in Argentina. As a result, Argentinian Central Bank can affect economic growth through the money flow between the markets by freely changing interest rate proportioned with the economic situation. Whereas there is no such a possibility for Iran’s Central Bank. In other words, an active Central bank against the inflation volatility in Argentina versus a passive Central Bank in Iran is one of the consequences of the interest rate repression in a political structure influenced by religion.

Suggested Citation

  • Sadeghi, Abdorasoul & Tayebi, Seyed Komail & Roudari, Soheil, 2023. "Financial markets, inflation and growth: The impact of monetary policy under different political structures," Journal of Policy Modeling, Elsevier, vol. 45(5), pages 935-956.
    • Handle: RePEc:eee:jpolmo:v:45:y:2023:i:5:p:935-956
    DOI: 10.1016/j.jpolmod.2023.08.003
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0161893823000972
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jpolmod.2023.08.003?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Jaroslava Botev & Balázs Égert & Fredj Jawadi, 2019. "The nonlinear relationship between economic growth and financial development: Evidence from developing, emerging and advanced economies," International Economics, CEPII research center, issue 160, pages 3-13.
    2. Juhro, Solikin M. & Iyke, Bernard Njindan & Narayan, Paresh Kumar, 2021. "Interdependence between monetary policy and asset prices in ASEAN-5 countries," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 75(C).
    3. Ben Jedidia, Khoutem & Boujelbène, Thouraya & Helali, Kamel, 2014. "Financial development and economic growth: New evidence from Tunisia," Journal of Policy Modeling, Elsevier, vol. 36(5), pages 883-898.
    4. Beck, Thorsten & Levine, Ross, 2004. "Stock markets, banks, and growth: Panel evidence," Journal of Banking & Finance, Elsevier, vol. 28(3), pages 423-442, March.
    5. Naceur, Samy Ben & Ghazouani, Samir, 2007. "Stock markets, banks, and economic growth: Empirical evidence from the MENA region," Research in International Business and Finance, Elsevier, vol. 21(2), pages 297-315, June.
    6. Adrian, Tobias & Song Shin, Hyun, 2010. "Financial Intermediaries and Monetary Economics," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 12, pages 601-650, Elsevier.
    7. Bahmani-Oskooee, Mohsen & Hajilee, Massomeh, 2013. "Exchange rate volatility and its impact on domestic investment," Research in Economics, Elsevier, vol. 67(1), pages 1-12.
    8. Allen, Franklin & Gale, Douglas, 1997. "Financial Markets, Intermediaries, and Intertemporal Smoothing," Journal of Political Economy, University of Chicago Press, vol. 105(3), pages 523-546, June.
    9. Slah Bahloul & Mourad Mroua & Nader Naifar, 2017. "The impact of macroeconomic and conventional stock market variables on Islamic index returns under regime switching," Borsa Istanbul Review, Research and Business Development Department, Borsa Istanbul, vol. 17(1), pages 62-74, March.
    10. Narayan, Paresh Kumar & Narayan, Seema, 2013. "The short-run relationship between the financial system and economic growth: New evidence from regional panels," International Review of Financial Analysis, Elsevier, vol. 29(C), pages 70-78.
    11. Goldfeld, Stephen M. & Quandt, Richard E., 1973. "A Markov model for switching regressions," Journal of Econometrics, Elsevier, vol. 1(1), pages 3-15, March.
    12. Iqbal, Javed & Mahmood, Fatima & Nosheen, Misbah & Wohar, Mark, 2023. "The asymmetric impact of exchange rate misalignment on economic growth of India: An application of Hodrick–Prescott filter technique," Economic Analysis and Policy, Elsevier, vol. 77(C), pages 809-823.
    13. Ali Aali-Bujari & Francisco Venegas-Martínez & Gilberto Pérez-Lechuga, 2017. "Impact of the stock market capitalization and thebanking spread in growth and development in LatinAmerican: A panel data estimation with System GMM," Contaduría y Administración, Accounting and Management, vol. 62(5), pages 3-4, Diciembre.
    14. Salisu, Afees A. & Vo, Xuan Vinh, 2021. "The behavior of exchange rate and stock returns in high and low interest rate environments," International Review of Economics & Finance, Elsevier, vol. 74(C), pages 138-149.
    15. Demirguc-Kunt, Asli & Levine, Ross, 1999. "Bank-based and market-based financial systems - cross-country comparisons," Policy Research Working Paper Series 2143, The World Bank.
    16. Seven, Ünal & Yetkiner, Hakan, 2016. "Financial intermediation and economic growth: Does income matter?," Economic Systems, Elsevier, vol. 40(1), pages 39-58.
    17. Marques, Luís Miguel & Fuinhas, José Alberto & Marques, António Cardoso, 2013. "Does the stock market cause economic growth? Portuguese evidence of economic regime change," Economic Modelling, Elsevier, vol. 32(C), pages 316-324.
    18. Singleton, Kenneth, 1987. "Speculation and the volatility of foreign currency exchange rates," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 26(1), pages 9-56, January.
    19. Abdorasoul Sadeghi & Hussein Marzban & Ali Hussein Samadi & Karim Azarbaiejani & Parviz Rostamzadeh, 2022. "Financial intermediaries and speculation in the foreign exchange market: the role of monetary policy in Iran’s economy," Journal of Economic Structures, Springer;Pan-Pacific Association of Input-Output Studies (PAPAIOS), vol. 11(1), pages 1-26, December.
    20. Levine, Ross, 2005. "Finance and Growth: Theory and Evidence," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 12, pages 865-934, Elsevier.
    21. Mohsen Bahmani-Oskooee & Massomeh Hajilee, 2010. "On the relation between currency depreciation and wages," Applied Economics Letters, Taylor & Francis Journals, vol. 17(6), pages 525-530.
    22. Cristian Barra & Roberto Zotti, 2022. "Financial stability and local economic development: the experience of Italian labour market areas," Empirical Economics, Springer, vol. 62(4), pages 1951-1979, April.
    23. Choudhri, Ehsan U. & Hakura, Dalia S., 2015. "The exchange rate pass-through to import and export prices: The role of nominal rigidities and currency choice," Journal of International Money and Finance, Elsevier, vol. 51(C), pages 1-25.
    24. Saba Mushtaq, 2016. "Causality between bank’s major activities and economic growth: evidences from Pakistan," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 2(1), pages 1-11, December.
    25. Frommel, Michael & MacDonald, Ronald & Menkhoff, Lukas, 2005. "Markov switching regimes in a monetary exchange rate model," Economic Modelling, Elsevier, vol. 22(3), pages 485-502, May.
    26. Yener Coskun & Unal Seven & H. Murat Ertugrul & Talat Ulussever, 2017. "Capital market and economic growth nexus: Evidence from Turkey," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 17(1), pages 1-19–29.
    27. Mohsen Bahmani-Oskooee & Massomeh Hajilee, 2010. "On the relation between currency depreciation and domestic investment," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 32(4), pages 645-660, July.
    28. Osbat, Chiara & Sun, Yiqiao & Wagner, Martin, 2021. "Sectoral exchange rate pass-through in the euro area," Working Paper Series 2634, European Central Bank.
    29. André Roncaglia De Carvalho & - André M. Marques, 2018. "Economic Development And Inflation: A Theoretical And Empirical Analysis," Anais do XLIV Encontro Nacional de Economia [Proceedings of the 44th Brazilian Economics Meeting] 41, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].
    30. Ji, Yaling, 2020. "Religiosity and the adoption of formal financial services," Economic Modelling, Elsevier, vol. 89(C), pages 378-396.
    31. Smita Mahapatra & Saumitra N. Bhaduri, 2019. "Dynamics of the impact of currency fluctuations on stock markets in India: Assessing the pricing of exchange rate risks," Borsa Istanbul Review, Research and Business Development Department, Borsa Istanbul, vol. 19(1), pages 15-23, March.
    32. Blau, Benjamin M., 2018. "Exchange rate volatility and the stability of stock prices," International Review of Economics & Finance, Elsevier, vol. 58(C), pages 299-311.
    33. Levine, Ross, 2002. "Bank-Based or Market-Based Financial Systems: Which Is Better?," Journal of Financial Intermediation, Elsevier, vol. 11(4), pages 398-428, October.
    34. Lee, Bong-Soo, 2012. "Bank-based and market-based financial systems: Time-series evidence," Pacific-Basin Finance Journal, Elsevier, vol. 20(2), pages 173-197.
    35. Yung, Julieta, 2021. "Can interest rate factors explain exchange rate fluctuations?," Journal of Empirical Finance, Elsevier, vol. 61(C), pages 34-56.
    36. Sequeira, Tiago Neves, 2021. "Inflation, economic growth and education expenditure," Economic Modelling, Elsevier, vol. 99(C).
    37. Chiu, Yi-Bin & Sun, Chia-Hung D., 2016. "The role of savings rate in exchange rate and trade imbalance nexus: Cross-countries evidence," Economic Modelling, Elsevier, vol. 52(PB), pages 1017-1025.
    38. Levine, Ross, 1999. "Law, Finance, and Economic Growth," Journal of Financial Intermediation, Elsevier, vol. 8(1-2), pages 8-35, January.
    39. Hüseyin Şen & Ayşe Kaya & Savaş Kaptan & Metehan Cömert, 2020. "Interest rates, inflation, and exchange rates in fragile EMEs: A fresh look at the long-run interrelationships," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 29(3), pages 289-318, April.
    40. Caetité, Alex Nery & Sousa, Almir Ferreira de & Savoia, José Roberto Ferreira & Bucchi, Wadico Waldir & Garcia, Fabio Gallo, 2022. "Does the deposit channel of monetary policy work in a high-interest rate environment?," Journal of Banking & Finance, Elsevier, vol. 145(C).
    41. Mushtaq, Saba, 2016. "Causality between Bank’s major activities and Economic Growth: Evidences from Pakistan," MPRA Paper 69052, University Library of Munich, Germany.
    42. Dindo, Pietro & Modena, Andrea & Pelizzon, Loriana, 2022. "Risk pooling, intermediation efficiency, and the business cycle," Journal of Economic Dynamics and Control, Elsevier, vol. 144(C).
    43. André Roncaglia de Carvalho & Rafael S. M. Ribeiro & André M. Marques, 2018. "Economic development and inflation: a theoretical and empirical analysis," International Review of Applied Economics, Taylor & Francis Journals, vol. 32(4), pages 546-565, July.
    44. Andrieș, Alin Marius & Căpraru, Bogdan & Ihnatov, Iulian & Tiwari, Aviral Kumar, 2017. "The relationship between exchange rates and interest rates in a small open emerging economy: The case of Romania," Economic Modelling, Elsevier, vol. 67(C), pages 261-274.
    45. Mattana, Elena & Panetti, Ettore, 2014. "Bank liquidity, stock market participation, and economic growth," Journal of Banking & Finance, Elsevier, vol. 48(C), pages 292-306.
    46. Leming Lin & Strahan, 2020. "Bank Deposits and the Stock Market," The Review of Financial Studies, Society for Financial Studies, vol. 33(6), pages 2622-2658.
    47. Hsu, Po-Hsuan & Taylor, Mark P. & Wang, Zigan & Xu, Qi, 2022. "Currency volatility and global technological innovation," Journal of International Economics, Elsevier, vol. 137(C).
    48. Manalo, Josef & Perera, Dilhan & Rees, Daniel M., 2015. "Exchange rate movements and the Australian economy," Economic Modelling, Elsevier, vol. 47(C), pages 53-62.
    49. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-384, March.
    50. Cem Eyerci, 2021. "Basics of Islamic Economics and the Prohibition of Riba," Springer Books, in: The Causes and Consequences of Interest Theory, chapter 0, pages 87-130, Springer.
    51. Pradhan, Rudra P. & Arvin, Mak B. & Ghoshray, Atanu, 2015. "The dynamics of economic growth, oil prices, stock market depth, and other macroeconomic variables: Evidence from the G-20 countries," International Review of Financial Analysis, Elsevier, vol. 39(C), pages 84-95.
    52. Nasir, Muhammad Ali & Duc Huynh, Toan Luu & Vo, Xuan Vinh, 2020. "Exchange rate pass-through & management of inflation expectations in a small open inflation targeting economy," International Review of Economics & Finance, Elsevier, vol. 69(C), pages 178-188.
    53. Zaremba, Adam & Cakici, Nusret & Bianchi, Robert J. & Long, Huaigang, 2023. "Interest rate changes and the cross-section of global equity returns," Journal of Economic Dynamics and Control, Elsevier, vol. 147(C).
    54. Pradhan, Rudra P. & Arvin, Mak B. & Bahmani, Sahar, 2015. "Causal nexus between economic growth, inflation, and stock market development: The case of OECD countries," Global Finance Journal, Elsevier, vol. 27(C), pages 98-111.
    55. Edson Manguinhane & Felix F. Simione, 2021. "An Empirical Assessment of the Exchange Rate Pass-through in Mozambique," IMF Working Papers 2021/132, International Monetary Fund.
    56. Wang, Qunyong & Lin, Xinyu, 2014. "Does religious beliefs affect economic growth? Evidence from provincial-level panel data in China," China Economic Review, Elsevier, vol. 31(C), pages 277-287.
    57. Abbassi, Puriya & Bräuning, Falk, 2023. "Exchange rate risk, banks' currency mismatches, and credit supply," Journal of International Economics, Elsevier, vol. 141(C).
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Abdorasoul Sadeghi & Hussein Marzban & Ali Hussein Samadi & Karim Azarbaiejani & Parviz Rostamzadeh, 2022. "Financial intermediaries and speculation in the foreign exchange market: the role of monetary policy in Iran’s economy," Journal of Economic Structures, Springer;Pan-Pacific Association of Input-Output Studies (PAPAIOS), vol. 11(1), pages 1-26, December.
    2. Guangdong Xu, 2022. "From financial structure to economic growth: Theory, evidence and challenges," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 51(1), February.
    3. Xu Guangdong, 2021. "Reassessing the Literature on the Relationship Between Financial Structure and Economic Growth," Review of Economics, De Gruyter, vol. 72(2), pages 149-182, August.
    4. Zouheir Abida & Imen Mohamed Sghaier & Nahed Zghidi, 2015. "Financial Development and Economic Growth: Evidence from North African Countries," Economic Alternatives, University of National and World Economy, Sofia, Bulgaria, issue 2, pages 17-33, April.
    5. Samarasinghe, Ama & Uylangco, Katherine, 2021. "An examination of the effect of stock market liquidity on bank market power," International Review of Financial Analysis, Elsevier, vol. 77(C).
    6. Kirikkaleli, Dervis & Athari, Seyed Alireza, 2020. "Time-frequency co-movements between bank credit supply and economic growth in an emerging market: Does the bank ownership structure matter?," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).
    7. Petra Valickova & Tomas Havranek & Roman Horvath, 2015. "Financial Development And Economic Growth: A Meta-Analysis," Journal of Economic Surveys, Wiley Blackwell, vol. 29(3), pages 506-526, July.
    8. Ghada Barsoum, 2007. "Egypt Labor Market Panel Survey 2006: Report on Methodology and Data Collection," Working Papers 704, Economic Research Forum, revised 01 Jan 2007.
    9. , Aisdl, 2019. "Stock Market And Economic Growth In Vietnam," OSF Preprints ucbhp, Center for Open Science.
    10. Didier, Tatiana & Levine, Ross & Llovet Montanes, Ruth & Schmukler, Sergio L., 2021. "Capital market financing and firm growth," Journal of International Money and Finance, Elsevier, vol. 118(C).
    11. Chung-Hua Shen & Chien-Chiang Lee & Shyh-Wei Chen & Zixiong Xie, 2011. "Roles played by financial development in economic growth: application of the flexible regression model," Empirical Economics, Springer, vol. 41(1), pages 103-125, August.
    12. Shikha Singh & Mandira Sarma, 2020. "Financial Structure and Stability: An Empirical Exploration," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 9(special i), pages 9-32.
    13. Marc Steffen Rapp & Iuliia A. Udoieva, 2018. "What matters in the finance–growth nexus of advanced economies? Evidence from OECD countries," Applied Economics, Taylor & Francis Journals, vol. 50(6), pages 676-690, February.
    14. James B. Ang, 2008. "A Survey Of Recent Developments In The Literature Of Finance And Growth," Journal of Economic Surveys, Wiley Blackwell, vol. 22(3), pages 536-576, July.
    15. Rubi Ahmad & Oyebola Fatima Etudaiye-Muhtar & Bolaji Tunde Matemilola & Amin Noordin Bany-Ariffin, 2016. "Financial market development, global financial crisis and economic growth: evidence from developing nations," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 15(3), pages 199-214, December.
    16. Philip Arestis & Georgios Chortareas & Georgios Magkonis, 2015. "The Financial Development And Growth Nexus: A Meta-Analysis," Journal of Economic Surveys, Wiley Blackwell, vol. 29(3), pages 549-565, July.
    17. Pradhan, Rudra P. & Arvin, Mak B. & Nair, Mahendhiran & Bennett, Sara E., 2020. "Unveiling the causal relationships among banking competition, stock and insurance market development, and economic growth in Europe," Structural Change and Economic Dynamics, Elsevier, vol. 55(C), pages 74-87.
    18. Beck, Thorsten, 2006. "Creating an efficient financial system : challenges in a global economy," Policy Research Working Paper Series 3856, The World Bank.
    19. Abdullahil Mamun & Mohammad Hasmat Ali & Nazamul Hoque & Md Masrurul Mowla & Shahanara Basher, 2018. "The Causality between Stock Market Development and Economic Growth: Econometric Evidence from Bangladesh," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 10(5), pages 212-220, May.
    20. Oparah Felix Chukwudi & James Tumba Henry, 2020. "Monetary Policy and Financial Stability in the Nigerian Banking Industry," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 11(1), pages 82-114, January.

    More about this item

    Keywords

    Economic Growth; Financial Markets; Inflation; Interest rate repression; Political structures;
    All these keywords.

    JEL classification:

    • B3 - Schools of Economic Thought and Methodology - - History of Economic Thought: Individuals
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • H1 - Public Economics - - Structure and Scope of Government

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jpolmo:v:45:y:2023:i:5:p:935-956. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/505735 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.