Evaluating the effects of Unconventional Monetary Policy Shock In VAR Using Sign Restrictions Approach

Resolving problems resulting from stagflation conditions accompanied with low economic growth and slow employment growth needs some policies that one of them can be unconventional monetary policy. Thus, this paper proposes to evaluate the effects of unconventional monetary policy shocks using VAR with a new method called sign restrictions. To this aim, it were estimated the effects of three variables ordered as real interest rate, inflation and gross domestic product by imposing positive and negative restrictions on these variables for the period 1961-2021. In this paper, the results of model estimation and impulse response functions is done by identifying and estimating parameters on the basis of imposing negative sign on interest rate according to unconventional monetary policy shocks. Results indicate that decreasing in interest rate causes increasing in GDP. Unconventional monetary policy can raise liquidity in stock market. It also support people by low interest rate loans for production with less cost and less sale price in Iran. Therefore, unconventional monetary policy can be a useful policy for resolving stagflation occurred current years in Iran.Extended Abstract:IntroductionThe global financial crisis(GFC) marked the transition from what many had labelled the period of “Great Moderation” to that of the “Great Recession”. The stress experienced by the financial sector starting in the summer of 2007 put an end to several years of robust growth for the world economy accompanied by moderate inflation rates across most advanced market economies. Across a number of countries, financial intermediation halted, with the peak of the stress manifesting in the final quarter of 2008. Unemployment increased and inflation dropped below central banks’ target levels as economic activity receded sharply. The recovery from the deep recession was also slow in many jurisdictions, with tepid economic growth, sluggish employment growth and subdued inflation. The challenges posed to monetary policy during this period were severe and pushed central banks to resort to actions departing from their established policy frameworks.The set of policy interventions introduced during this period has been labelled as unconventional monetary policy in order to distinguish it from the conventional pre-GFC policy measures. Some unconventional monetary policies were designed to affect term spreads such as long-term risk-free rates, while others were directed at influencing liquidity and credit spreads such as interest rates on various non-risk-free instruments. One of the most important tools in unconventional monetary policy is negative interest rate policy (NIRP). The adoption of negative policy interest rates in the aftermath of the GFC was new. Identification of shocks is one of the most important issues in econometrics for interpreting their impact on themselves and also other variables. Therefore, in case of unconventional monetary policy, VAR model is applied for identifying shocks. In the research, it was identified different shocks using sign-restriction approach in Iran for the period 1961-2021.