Volume 12, Issue 3 (2012)
QJER 2012, 12(3): 133-163 |
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Falahati A, Sohaili K, Noori F. Inflation Rate and the Performance of Financial Markets in Iran. QJER 2012; 12 (3) :133-163
URL: http://ecor.modares.ac.ir/article-18-463-en.html
URL: http://ecor.modares.ac.ir/article-18-463-en.html
1- Associate Professor of Economics, Razi University, (Responsible Author)
2- Associate Professor of Economics, Razi University
3- M.A. in Economic, Razi University
2- Associate Professor of Economics, Razi University
3- M.A. in Economic, Razi University
Abstract: (11072 Views)
Achieving a high and sustainable economic growth has always been the main target of economic plans in different countries. Proving a positive relationship between financial development and economic growth by many studies has convinced the researchers to study the effective factors on the growth and development of financial markets. Inflation is one of the main factors that have a great impact on the countries’ financial development. So, the focus in the studies has mainly been on explaining the form of relationship between inflation and financial development. In this paper, the relationship between inflation and financial market development in Iran during 1978 to 2007 for the money market and during the summer of 1999 to spring of 2008 for the capital market has been reviewed. Econometric model of this research has been specified according to Boyd, Levine and Smith model (2001). Firstly, a simple linear model is used for controlling other economic factors that may be correlated with financial market performance. Then, a threshold regression is handled for explaining the nonlinear relationship between inflation and financial market development. In this model, different thresholds that limit inflation are considered. Conditional least squares method (CLS), is applied for estimating the model. The threshold limit for inflation has been determined based on the minimum error sum of squared criterion. The results of the estimated model indicate that a negative relationship between inflation and financial development indexes of money market. This positive relationship also exists between inflation and stock market development indexes. In the same way, the output of the estimated models has shown that in the some domain of inflation, the negative relationship between inflation and financial development indexes of money market is not significant. In addition, the results of the estimated models revealed that there is no a threshold limit for the impact of inflation on the stock market.
Keywords: Inflation, Financial Development, Financial markets, Money markets, Capital markets, Threshold
Received: 2011/01/1 | Accepted: 2011/10/16 | Published: 2012/09/24
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