Investigating the Dynamic Spillover among Exchange Rate, Stock Market Index, Housing Price and Inflation in Iran: Does the Severity of Sanctions Matter?

Examining the spillover effects between exchange rates, stock market index, housing prices and inflation is one of the key issues in macroeconomics. This topic is particularly important in relation to Iran, which has been affected by various international sanctions for many years and has restricted the role of oil exports in the economy. Because the application of international sanctions can have a significant effect on the relationship between indicators as well as their impact and effectiveness on the investigated network, we study the effects of the dynamic spillover between the above four indices by using a TVP-VAR model that is based on Diebold and Yilmaz (2012). We have also focused on three time periods: the whole period (March 2006-January 2022), the first period of sanctions (June 2010-July 2015) and the second period of sanctions (May 2018-January 2022). The results show that in all three periods, inflation rate is the most influential indicator in the network. But these results are different in relation to the percentage of influence of these four indicators on the entire network. In the entire period and in the first period of sanctions, exchange rate volatilities have been the main channel of transmitting shocks to the network. However, in the second period of sanctions the main transmitter is inflation. According to the results, the increase in the exchange rate (devaluation of riyal) has been the most important key factor in creating destructive fluctuations in Iran’s economy, which ripples through the entire economy, affecting the stock market index, inflation rate, and housing prices.