Investigating the Asymmetric Relationship between Financial Instability, Monetary Policy and Economic Growth in Iran

This study investigated the asymmetric effects of financial instability shocks on economic growth and monetary policy shocks on financial instability in Iran. For this purpose,data 1991:3 to 2017:1 and nonlinear auto-regressive distributed lag (NARDL) approach has been used. For this purpose, three models have been estimated. In the first model, the asymmetric effects of fiscal instability shocks on economic growth are studied and in the next two models, the asymmetric effects of monetary policy shocks are investigated. The results of the first model indicate positive financial instability shock has a negative effect and negative shock has a positive effect on economic growth. Also, in the second model, the results indicate that a positive interest rate shock has a negative effect and a negative interest rate shock has a positive effect on financial instability. The results of the third model estimate indicate that a positive Liquidity growth shock has a positive effect and a negative Liquidity growth shock has a negative effect on financial instability. The results of the effect of government spending on financial instability in the second and third models are different due to the application of different monetary policy tools in the two models, Therefore, it can be said that the effect of government spending on financial instability can vary depending on the type of monetary policy. The results of the Wald test show that the effects of financial instability shocks on economic growth and the effects of monetary policy shocks on financial instability in the short run and long run is asymmetrical. Also, the effect of Liquidity growth on financial instability is asymmetric in the short run but symmetric in the long run.