Study of financial institutions and markets development in the effectiveness of monetary policies to reduce unemployment

The rapid growth of financial systems and the expansion of its various dimensions in societies have attracted special attention to this category and its effects on the mechanisms, processes and functions of the economy. In this regard, it is very important to investigate the role of financial systems development as the main infrastructure for the implementation of monetary policy and the realization of pre-determined policy goals. In this study, considering the policy goal of reducing unemployment, the impact of financial development on the effectiveness of monetary policy is examined. For this purpose, by emphasizing the two instruments of interest rate and monetary base, in the first step, the effectiveness of monetary policy on reducing unemployment in terms of each instrument is estimate, separately and in the form of Autoregressive Distributed Lags (ARDL) Model for 1989: 1 to 2016: 4 In Iran, and then using rolling regression models, the effectiveness of each monetary policy is extracted over time. In the final step, the relationship between the estimated effectiveness and the financial development index is estimated. The results show that the development of financial institutions and markets has a diminishing effect on the effectiveness of monetary policy using interest rate tools to achieve the goal of reducing unemployment, but this diminishing effect on the effectiveness of monetary policy using the monetary base is significant only for the development of financial institutions.