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Expansion of financial markets including capital market is a key factor in increasing investment, which affects significantly the economic growth and development. Any change in monetary policy will influence real sector of economy, prices and returns on stocks. The performance of stock market is of considerable effect on macro economy, and plays substantial role in the monetary policy transmission process. In this paper, we examine the effect of monetary policy on the stock market using a five-variable structural vector auto-regressive model by applying monthly data during March 2005 to March 2013. The results suggest that the monetary policy through liquidity and loans directed to private sector is of significantly positive effect on the stock market index. As a result, expansionary monetary policy by increasing the liquidity and loans directed to the private sector improves stock market general index. In addition, changes in monetary policy through exchange rate and real interest rate have significant and negative effects on this index. The contractionary monetary policy through interest rate improves stock market index. Finally, shocks resulting from changes in exchange rate exacerbate the monetary policy in the short term, which in turn worsen the stock market index.

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This paper aims to analyze the importance of balance sheet channel of credit approach in monetary transmission mechanism in Iran during 1989:2-2014:1. This analysis is based on a structural vector auto-regression (SVAR) model with ten variables including asset prices and the other seven-variable model excluding asset prices. These models are comparable with each other while assessing the importance of balance sheet channel. The comparison of SVAR model containing asset prices such as housing price, gold coin price, stock price and exchange rate with SVAR model excluding asset prices implies that adding asset prices to the model increases the effects of monetary policy shocks, through liquidity shocks, on output fluctuations. The findings confirms the importance of the balance sheet channel in monetary transmission mechanism. Therefore, monetary authorities should take precautions in implementing tight monetary policy due to its probable recession effect.