Nonlinear Transmission Mechanism of Monetary Policy through the Inflation Level Channel in Iran’s Financial Market

Document Type : Research Paper

Authors

1 Ph.D. Candidate, Department of Economy, Urmia Branch, Islamic Azad University, Urmia, Iran.

2 Assistant Prof., Department of Economy, Urmia Branch, Islamic Azad University, Urmia, Iran.

10.22059/frj.2024.380643.1007630

Abstract

Objective
Many economists share the view that monetary policies can influence the real sector of the economy in the short run, yet their disagreements center on the transmission channels involved and the relative importance of these channels. Furthermore, the effort to understand the relative significance of monetary policy transmission channels in financial markets remains a primary motivation for conducting empirical analyses of monetary policy transmission, supporting the effective management of monetary policy in many countries.
 
Methods
The study applies a nonlinear approach based on the Gauss–Markov theorem. Linear regression models offer a broad and rich framework capable of addressing many analytical needs and research inquiries. However, linear regression is not suitable for all problems, as in certain cases the response variable and the regressors are related through a known nonlinear function. One of the most important advantages of employing nonlinear models lies in their ability to provide reliable estimates of unknown parameters in the model using relatively small datasets.
 
Results
Past studies on monetary policy transmission mechanisms in financial markets have highlighted that monetary policy in financial markets is transmitted through multiple channels, while its effects on output and prices occur with a time lag. Notably, the share of the inflation rate channel in transmitting money to prices in the zero regime (low money growth) is greater and more persistent than in the one regime (high money growth). In other words, within the zero regime, an increase in money supply leads to a greater rise in the inflation rate, and the higher inflation rate produces more enduring effects on the price level. Given that the inflation rate channel in both regimes exhibits a negative role in transmitting money to output, it is recommended that the central bank, in order to boost output, should control other factors affecting the inflation rate and prevent sharp increases and excessive growth in inflation.
 
Conclusion
This study reveals that the role of the inflation rate channel in the monetary transmission mechanism indicates that increasing the money supply via the inflation rate channel in the zero regime has had no role in transmitting money to output, whereas in the one regime, the inflation rate channel has had a significant share in transmitting money to output. In this latter case, changes in the money supply through the inflation rate channel have led to reductions in output. The monetary policy transmission mechanism in financial markets pertains to the effects of monetary policy on output and prices in the financial market and remains the chief motivation for empirical analysis in support of effective monetary policy management in financial markets across numerous countries, with the aim of limiting its negative impacts on output.
 
 

Keywords

Main Subjects

References

 
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Financial Research Journal
Volume 27, Issue 4
2025
Pages 987-1009

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