Journal of Economic Modeling Research

  This paper investigates the relationship between real exchange rate uncertainty and stock price index in Tehran stock exchange for the period of 1995-2009 by using monthly data and applying Bivariate Generalized Autoregressive Conditional Heteroskedasticity model (Bivariate GARCH). The results show that there is a negative and significant relationship between real exchange rate uncertainty and stock price index. However, the relationship between stock price uncertainty and real exchange rate is insignificant. Therefore, our results recommend that the policies which cause more volatility in the exchange market and also more volatility in the real exchange rate should be avoided to ensure the sustainable growth of the stock market and its price index.

This paper investigates the relationship between monetary policy and stock market fluctuations for Iranian economy within a DSGE model. This study models the role of monetary policy in two monetary regimes including money growth and Taylor rule with traditional factors and optimal simple rule in the new Keynesian monetary framework with nominal wage and price rigidities in the Iranian economy. Bubbles in our model emerge through a positive feedback loop mechanism supported by self-fulfilling beliefs. Results show that: first, using an optimal simple rule and determining the optimal coefficients of the Taylor rule by policy makers decrease the loss function. Second, the sentiment shock which represents the size of current bubbles relative to newly born bubbles and transfers to the real economy through endogenous credit constraint, drives the movements of stock market fluctuations and variations in real economy, leading to explain the positive contemporaneous correlation between stock prices and the real economy Third, using an optimal simple rule and determining the optimal coefficients of the Taylor rule with stock price Fluctuations by policy makers decrease the loss function and it confirms that monetary policy should respond to stock market bubbles in the economy.