The Effect of Monetary Policy Uncertainty on Stock Market Uncertainty

Objective: There is a high degree of uncertainty in developing countries including Iran. Production growth, inflation, exchange rate and other important macroeconomic variables are subject to more fluctuations than the economies of industrialized countries. In these countries, the economic structures have not been fully formed and the variables affecting the banks' profitability due to the monopoly power and the size of the government are strongly affected by the sudden and hasty decisions of the policy makers and the government.

In developing countries, institutional limitations make financial intermediation and the effectiveness of public policies difficult. For example, monetary policy transmission is hindered by weaknesses in the legal environment, underdeveloped financial markets, and centralized banking systems. Undoubtedly, the efficiency of the financial system of a country as a subset of the economic system of that country and considering the mutual relations with other components, can have a significant effect on the efficiency of the economic system. Meanwhile, the capital market, as a subset of the financial system, has a special position and plays an essential role in attracting, directing and allocating the capital in the society towards investment in production and job creation. The stock exchange is an economic market where the buying and selling of securities takes place under certain rules and regulations. Considering the supply of shares of the largest and most important economic units of the country in the stock market, any change in the economic, political, etc. conditions can quickly affect the stock exchange and cause it to fluctuate. Providing favorable conditions for investment in the stock market leads to the prosperity of industries and creation of employment and exit from economic crises. Considering the importance of this issue, preventing the pests that threaten this market and discovering its current inadequacies and trying to solve these problems is considered necessary. Therefore, considering the importance of the capital market in the country's economy on the one hand and the occurrence of multiple shocks in the field of monetary policy, the main purpose of this study is to investigate the effect of monetary policy uncertainty on stock market uncertainty in Iran. The purpose of this study is to investigate the effect of monetary policy uncertainty on stock market uncertainty in Iran.

Methods: In this research, the positive and negative shocks of uncertainty in monetary policies have been calculated using the NARDL approach. Also, using stochastic differential equations (SDE), uncertainty index in Tehran stock market has been estimated. In order to estimate the research models, the annual data of Iran's economy during the period of 1989-2021 have been used.

Results: The results of the ARDL linear model show that in the long term, the uncertainty of monetary policies causes the intensification of uncertainty in the stock market. On the other hand, in the non-linear ARDL model, the results showed that monetary policy uncertainty shocks in the first place do not have an asymmetric effect on stock market uncertainty, and secondly, negative shocks have a positive effect on stock market uncertainty in the long term. Other results showed that government size and economic growth do not play a role in stock market uncertainty. While, the exchange rate, inflation rate and interest rate affect the uncertainty of the stock market.

Conclusion: Low interest rate policies by the central bank may change the investment behavior of investors to risky strategies. This monetary policy transition can lead to financial instability and affect stock market uncertainty. Finally, based on the results, suggestions have been presented.

Lack of confidence was the main problem of the last financial market crisis and has rekindled the debate about the behavioral channel of monetary policy. Low interest rate policies by the central bank may change the investment behavior of investors to risky strategies. This monetary policy transition can lead to financial instability and affect stock market uncertainty. Bakkert and Herva (2010) examine the direct effect of monetary policy on stock market uncertainty, which appears to be insignificant. However, they establish a link between monetary policy and risk aversion, potentially affecting stock market uncertainty. Therefore, if monetary economics affects stock market uncertainty, this is an unresolved question in monetary economics. The results show that monetary policy increases stock market confidence in a linear manner. Therefore, linear methods are suitable tools to investigate the impact of macroeconomic indicators on stock market confidence. Conversely, the relationship between certainty and uncertainty is highly non-linear and is introduced at the macroeconomic level by a game with strategic complements. Stock market uncertainty may also affect monetary policy. Stock market uncertainty shocks predict economic activity and lead to sharp declines in employment and output. Therefore, it can be assumed that the monetary authority responds to stock market uncertainty because it contains information about future economic outcomes.