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Journal of Policy Modeling 45 (2023) 935–956

www.elsevier.com/locate/jpm

Financial markets, inflation and growth: The impact of

monetary policy under different political structures
⁎
Abdorasoul Sadeghi a, , Seyed Komail Tayebi b, Soheil Roudari c
a
Department of Economics, Shiraz University, Shiraz, Iran
b
Department of Economics, University of Isfahan, Isfahan, Iran
c
Department of Economics, Ferdowsi University of Mashhad, Mashhad, Iran
Received 20 March 2023; Accepted 29 July 2023
Available online 3 September 2023

Abstract

This study assesses the likely effects of different political structures on economic growth by the effects of interest
rate on the linkage between financial markets. For this aim, we chose two developing economies with different
governance structures, Iran and Argentina. There is a political structure in Iran influenced by religion, whereas
Argentina’s political structure does not deal with religion. We first assess the causality amongst the financial
markets of the stock market, bank deposits, and the foreign currency market (CM). Then, the effects of the
markets and inflation on economic growth are assessed using Granger-causality tests and Markov-switching
models. The results show that there are bidirectional causalities between the financial markets in Iran, and
unidirectional causalities in Argentina. The markets affect economic growth in the both countries. For Iran, the
monetary policy instrument of interest rate indicates no causalities to the markets, whereas there are strong
causalities from interest rate to the markets in Argentina. As a result, Argentinian Central Bank can affect
economic growth through the money flow between the markets by freely changing interest rate proportioned with
the economic situation. Whereas there is no such a possibility for Iran’s Central Bank. In other words, an active
Central bank against the inflation volatility in Argentina versus a passive Central Bank in Iran is one of the
consequences of the interest rate repression in a political structure influenced by religion.
© 2023 The Society for Policy Modeling. Published by Elsevier Inc. All rights reserved.

JEL Classifications: B3; E4; E44; E5; H1

Keywords: Economic Growth; Financial Markets; Inflation; Interest rate repression; Political structures

⁎
Corresponding author.
E-mail address: sadeghi.r1988@gmail.com (A. Sadeghi).

https://doi.org/10.1016/j.jpolmod.2023.08.003
0161-8938/© 2023 The Society for Policy Modeling. Published by Elsevier Inc. All rights reserved.
A. Sadeghi, S.K. Tayebi and S. Roudari Journal of Policy Modeling 45 (2023) 935–956

1. Introduction

Economic growth has faced high fluctuations in Iran’s economy. It has been negatively in
some periods, and positively in some other periods, experiencing −7 %, and +13 %. the average
has been 3.1 %, which is not an acceptable average regarding the high share of oil exports in
GDP.1 On the other hand, unlike economic growth, inflation shows a high average 19.78 %.2
For Argentina, there has been the same condition. Economic growth shows high volatilities,
experiencing −10.8 % and +10.1 % with an average 2.4 %. Regarding inflation, Argentina
encountered strangely much volatilities with an average 196 %, experiencing +3k % and also
negative percentages.3
The financial intermediaries can potentially affect the real sectors of an economy due to their
roles in investment by mobilizing financial resources (Greenbaum et al., 2019; Levine, 2005;
McKinnon, 1973; Sadeghi et al., 2022; Seven & Yetkiner, 2016). On the other hand, the foreign
currency rate can have some potential effects on an economy as well. More specifically, con­
sidering its effects on the firms’ input and products prices, and their competitiveness in the
international market; it can potentially influence the nominal and real sectors of an economy
(Bahmani-Oskooee & Saha, 2016).
Financing productive economic activities is one of the determining factors for achieving the
targeted economic growth. It might differently influence the nominal and real economic in­
dicators if money flow is towards the stock market, Bank deposits, and the CM. The investors
choose the financial markets based on their potential for gaining profits as well as the measure
of risk. Therefore, rising or at least keeping the value of different assets over time causes
investors to choose the stock market, banks deposits, or other financial markets such as the CM.
The stock market and bank deposits have enough potential to be in the circle of investor’s
choices. The attractiveness of investing in bank deposits depends on the relationship between
nominal interest rate and inflation rate. However, investing in bank deposits might encounter the
risk of value reduction due to negative real interest rates originating from high inflation and the
repression of nominal interest rate. The reality that has existed in Iran’s economy in the most
years of under-review period. In fact, depositors have been paying inflationary tax considering
high inflation rates, and the lack of a proportion between the nominal interest rate of bank
deposits and inflation rates. In other words, the nominal interest rate of bank deposits has been
consistently repressed. The repression concerns the effects of religion on the economic policies.
In fact, the Central Bank continuously faces some limitations in freely using interest rate due to
the sensitivity of religion to interest rate. The limitations make the Central Bank passive against
the volatility of inflation.
For Argentine, the Central bank has not faced such limitations as its political structure is not
influenced by religion. Hence, the Central Bank can proportionally respond to the inflation
volatility without any limitations in freely using interest rate. In other words, we do not face the
interest rate repression originated from a political structure influenced by religion in Argentina.
The issue that Iran’s Central Bank deals with that.
On the other hand, although the stock market can attract investors’ attention in an infla­
tionary environment because of rising corporations’ products prices, it also probably meets the

1
https://databank.worldbank.org/source/world-development-indicators
2
https://tsd.cbi.ir/Display/Content.aspx
3
https://www.worlddata.info

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risk of the rise in inflationary costs due to the increase in input prices. To sum up, it makes the
profitability outlook of corporations unclear for investors. The issue finding more importance in
economies such as Iran and Argentina that most parts of their economies_ manufacturing,
consumption, and service_ are highly relied on the imported input.
The situation of interest rate finds remarkable matter for corporations listed on the stock
market from two aspects. First, having enough access to financial resources. To realize this, the
attraction of investing in bank deposits lies in the center of policies. Second, the cost of ac­
cessing the financial resources of bank deposits finds noticeable importance. In summary, the
measure of bank deposits and borrowing costs are affected by interest rate. Hence, the same as
bank deposits, the stock market can also be affected by religious limitations effective on po­
litical structures and economic policies.
Following the stock market and bank deposits, we have the CM. the same as the stock market
and banking sector, the CM can potentially affect the nominal and real sectors of an economy.
The currency rate volatility can negatively affect investment by raising uncertainty (Sadeghi
et al., 2022; Singleton, 1987). It considerably matters in Iran’s economy, considering the high
dependence of both supply and demand sectors on imported input as well as final consumer
products. As foreign and national currencies along with stocks and deposits might lie in in­
vestors’ portfolios. the CM can be a potential substitute market for the stock market and
banking sector in absorbing the money flow. In addition, in an economy as Iran, regardless of its
sources, there has always been a gap between foreign currency rates. The issue beginning and
continuing from 1987 to the current time. As Allen & Gale (1997) and Sadeghi et al. (2022)
discuss that the speculation incentives in financial markets can be a substitution for other asset
forms.
For Argentina, even though there has not been the gap between foreign currency rates, the
CM have had enough potential to be attractive for people to lay it in portfolios. As pointed out
above, given the high volatility of inflation in Argentina, the CM also shows high volatilities.
the volatilities turning the CM into a substitute market for the stock market and banking sector
to attract money flow, the same as the issue happening for Iranian economy. No need to mention
that the value of national currency is affected by inflation, and that holding cash has no suf­
ficient charm in an economy with a high inflation. Therefore, in the economies with an infla­
tionary environment such as Iran and Argentina, foreign currencies can potentially lie in
investors’ portfolios.
The same as the stock market and bank deposits, the CM is also affected by interest rate.
Interest rate can affect the CM by the channels such as the motivations of borrowing and
lending, and consequently the liquidity volume, domestic economy’ attraction for foreign in­
vestors, and finally inflation. on the other hand, we are in knowledge that interest rate has been
an institutional instrument besides a monetary policy instrument by taking into account the
history of some countries. We historically experienced it in the western countries before hap­
pening the renaissance. When political structures influenced by religion governed. More spe­
cifically, according to Weber’s studies, the Catholic church showed high sensitivity to interest
rate in medieval European countries (Nelson, 1973; Kaelber, 2004). In the current century,
interest rate is still an unsolved issue in some countries with a political structure influenced by
religion, including some Islamic countries as Iran.
Different political structures in Argentina and Iran from being affected by religion, leading to
the repression of interest rate in Iran, and the lack of such a repression in Argentina, makes this
study totally different from previous studies. In other words, the current study is the first effort
to assess the likely effects of different political structures on economic growth through the
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effects of religious sensitives to interest rate on the markets. As Calder (2016) criticizes why the
importance of religion has not been taken into account, in spite of Weber’s studies’ emphasis on
the relationship amongst economics, interest rate, and religion. According to Weber’s view,
there is a conflict between religion and interest rate (Brown, 2015).
In this regard, we chose two countries with different political structures from being influ­
enced by religion. In Iran, a political structure governs influenced by religion, whereas there is
not such a structure in Argentina. Hence, Iranian Central bank is faced with some religious
limitations on freely using interest rate proportioned to economic situation. in contrast,
Argentinian Central Bank does not deal with such limitations to proportionally use its monetary
policy instrument of interest rate. on the other hand, some similarities regarding the two
countries motivated us to choose Argentina and Iran, including the high volatility in the foreign
currency markets, economic growth and inflation rates, lying amongst the developing econo­
mies, and the high share of banking sector compared to the stock market in financing. In
addition, a profound difference between the responses of the two countries’ Central Banks to the
inflation volatility caused us to choose these economies. Given the above discussion, the study
can sufficiently contribute to the existing literature.
The study is organized as follows: section 2 pays attention to the political structures and
monetary policies, and data description. Section 3 assigns literature review. In section 4 and 5,
methodology and empirical results are paid. Section 6 is devoted to discussion. Conclusion and
policy implications are provided in section 7.

2. Political structures and monetary policies

According to Fig. 1, Argentina’s Central bank responded suitably to the volatility of inflation
at the most years of the under-review period. In other words, the Central bank changes the
nominal interest rates of bank deposits proportioned to the inflation volatility. Hence, as we can

Fig. 1. The situation of inflation, nominal and real interest rates in Argentina. Note: Nominal and real interest rates as
well as inflation rates are shown in pink, green, and yellow in order. The time period is 1988–2018. The black line
shows zero. The changes in nominal and real interest rates as well as inflation rate are shown in distinct ranges.
Necessary to say that we did not consider the data 1988–1992 due to very high volatility in inflation and interest rates
compared to the other years. In these years, inflation rates were 342 %, 3k %, 2313 %, and 171 %, whereas interest rates
show 371 %, 1724 %, 1520 %, and 61 %.

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Fig. 2. The situation of inflation, nominal and real interest rates in Iran. Note: Nominal and real interest rates as well as
inflation rate are shown in pink, green, and yellow in order. The time period is 1988–2018. The black line shows zero.
The changes in the variables are shown in distinct ranges.

see in Fig. 1, the real interest rates of bank deposits are positive in most years. As shown in
Fig. 1, the changes of the nominal interest and inflation rates are in the same range. It shows the
proportional responses of Argentina’s Central bank to the inflation changes.
On the other hand, according to Fig. 2, Iran’s Central Bank did not respond to any volatility
in inflation. in other words, the Central Bank has been totally passive against the inflation
changes. More specifically, there has not been any proportion between the nominal interest rates
of bank deposits and inflation rates in most years. Thus, as indicated in Fig. 2, the real interest
rates of bank deposits are negative in all years but the last 4years (2014–2018). In addition, the
repression of nominal interest rates is obvious enough according to Fig. 2. the changes of
nominal interest rates and inflation are in different ranges. The inflation volatility mainly lies in
a higher range than the range of the nominal interest rate changes. It shows the non-proportional
responses of the Central bank to the inflation volatility in Iran.
According to the above discussion, there has been an obviously profound difference between
Argentinian and Iranian Central Banks’ responses to the inflation changes. The difference re­
lating to the political structures governing in the two countries. Following a revolution in 1987,
a new political structure, being affected by Islamic rules, formed in Iran. In Islam religion, there
are high sensitivities to interest rate. Hence, the monetary policy of Iran’s Central bank is also
affected by Islamic rules. The religion causes the Central Bank not to be able to freely use its
monetary policy instrument of interest rate. In other words, the repression of interest rate is one
of the consequences of a religious governance in Iran. The issue that Argentina’s Central Bank
has not dealt with that. As a result, whereas Argentina’s Central Bank proportionally responds
to the inflation changes by freely using interest rate, there is no such a possibility for Iran’s
Central Bank. In summary, we witness an active Central Bank in Argentina versus a passive one
in Iran against the inflation volatility.

2.1. Data description

Tables 1 and 2 show descriptive statistics for 1988–2018. For the CM in Iran and Argentina,
we employed Iranian (Rial) and Argentinian (Peso) currencies versus the US dollar. For Iran,
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Table 1
Descriptive statistics of 1988–2018 for Iran.
IR INF GDP INV H OIL FS FB CM

Mean 0.134 0.1978 0.03079 0.01925 0.00598 0.07223 0.41073 0.03874 0.072219
Median 0.14 0.1734 0.02795 0.03242 0.01165 0.14168 0.39026 0.25127 0.16997
Maximum 0.23 0.4965 0.12956 0.39153 0.31282 0.61369 1.54803 0.44118 2.29722
Minimum 0.082 0.0762 -0.07736 -0.30751 -0.06867 -0.59325 -0.48326 -6.61359 -5.23094
Std. Dev. 0.034 0.0936 0.04627 0.12906 0.07119 0.30988 0.51282 1.23605 1.39484
Note: Note: IR, INF, GDP, INV, H, OIL, FS, FB, and CM are in order: the interest rates of bank deposits, inflation, the
growth of gross domestic product, investment, human capital, oil earnings, stock market, bank deposits, and foreign
currency rates. Except for GDP, INV, and H released by the World Bank, other data published by Iran’s Central Bank.

Table 2
Descriptive statistics of 1988–2018 for Argentina.
IR INF GDP INV H FS FB CM

Mean 1.2215 1.9665 0.0248 0.01365 0.0061 0.00228 0.0012 0.1502

Median 0.1147 0.1032 0.03334 0.03187 0.00409 -0.0019 0.0017 0.01891
Maximum 17.24 30.7981 0.1012 0.1404 0.05676 0.10471 0.04661 1.6845
Minimum 0.0262 -0.0117 -0.1089 -0.1968 -0.0198 -0.08826 -0.0677 -0.0236
Std. Dev. 4.0875 6.8775 0.05883 0.08118 0.01486 0.04846 0.02609 0.3597
Note: IR, INF, GDP, INV, H, FS, FB, and CM are in order: the interest rates of bank deposits, inflation, the growth of
gross domestic product, investment, human capital, stock market, bank deposits, and foreign currency rates. The dataset
of IR, GDP, INV, H, FS, FB, and EX are released by the World Bank. For INF, we used https://www.worlddata.info.

given the existence of the gap between foreign currency rates, we used the differences between
official and unofficial currency rates. This gap can boost the speculation incentives for gaining
profits in the CM. For Argentina, the official foreign currency rates are used. The CM shows
high fluctuations following the high volatility of inflation in the both countries. The average of
the short-term and long-term deposits (one year) is used for bank deposits (FB) in Iran. For
Argentina, we applied the value of the bank deposits to GDP. For the stock market (FS) in Iran
and Argentina, we orderly used the value of the stocks traded, and total value traded to GDP.
For human capital (H), the secondary school enrollment is employed. For investment (INV),
gross fixed capital formation is applied. The gross domestic production for economic growth
(GDP), Inflation rate (INF) for Argentina, and Consumer Price Index (CPI) for Iran are used.
Finally, we take advantage of the interest rates of bank deposits (IR) for the monetary policy
instrument. In addition to a monetary policy instrument, interest rate is also an institutional
variable. As discussed before, it transmits the effects of religion on economic policies at which a
religious structure governs.
According to Tables 1 and 2, there are a mean 19.7 % for Inflation in Iran, whereas it is 196
% for Argentina. The maximums of inflation rates are orderly 49 % and 3k % in Iran and
Argentina. The least inflation rates that they experienced were 8 % for Iran and −1 % for
Argentina. Thus, as indicated by the standard deviation, the volatilities of inflation in Argentina
are higher than those of in Iran. In sum, the inflation volatility is considerably high in the both
countries.
Regarding the nominal interest rates of bank deposits, there are the means 13 % and 122 %
for Iran and Argentina in order. The maximum is 23 % in Iran, and 1724 % in Argentina. The
minimum is 8 % in Iran, and 2 % in Argentina. Hence, as shown by standard deviation, the

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volatilities of interest rates in Argentina are so higher than those of in Iran. Although the
inflation volatility is high in the both economies, the changes of interest rates are not propor­
tional with inflation, and show rather a constant range in Iran. Whereas the changes in interest
rates are considerably proportional with high volatility in inflation rates for Argentina.
In regard to the situation of the markets, as shown by the standard deviation, each three
markets, including the stock market, bank deposits, and the CM, show more volatility in Iran
compared to Argentina. In addition, economic growth shows higher volatility in Argentina
compared to Iran.

3. Literature review

We are supposed to assess the likely effects of the governance structures on economic
growth by the effects of interest rate on money flow between the markets, including the stock
market, bank deposits, and the CM. hence, we first need to investigate the relationship between
the markets and economic growth. Then, the effects of interest rate on the markets are ex­
amined. Thus, the literature is presented according to the above aims.
In the first part of the literature, the effects of interest rate on the markets are reviewed. In
this respect, we first review the historical literature of the relationship between economics and
religion. Few studies paid attention to Weber’s discussion of interest rate. he consistently had an
emphasis on the effects of religion on economics and interest rate (Brown, 2015). Calder (2016)
discusses that there is a high sensitivity to interest rate in Islamic countries, leading to a ban on
taking interest. He points out that the sensitivity to interest rate is not only about Islam, but also
there were such sensitivities in Judaism and Christianity. Eyerci & Eyerci (2021) reviews the
historical background of Islamic economics and its basic principles different from the global
conventional systems, particularly its main distinctive feature named the prohibition of interest.
Weber believed in some conflict between economics and religion, especially regarding the
sensitivity of the church to interest rate (Brown, 2015). According to Brown (2015), the re­
ligious institution, the church, influenced medieval European economies by its sensitivities and
limitations on interest rate. Recent studies such as Wang & Lin (2014) conclude that religion
can affect economic growth. Sadeghi et al. (2022) found out that the limitations of religion on
interest rate makes the Central Bank not sufficiently affect the financial markets. Ji (2020)
shows there is a linkage between financial services and religious behavior. In addition, they
point out that institutional factors as religion can be an important driver in an economy.
According to Juhro et al. (2021) real stock prices are negatively affected by an increase in
interest rate. Salisu & Vo (2021) show that the relationship between the foreign currency and
stock markets is affected by the changes of interest rate. The study of Zaremba et al. (2023)
indicates that the stock market can be affected by the changes in interest rates. Mushtaq &
Siddiqui (2017) show that interest rate has no impact on bank deposits. Whereas, in the case of
non-Islamic countries, interest rate shows positive impact. As a result, religious factor makes
interest rate not impact bank deposits. Caetité et al. (2022) conclude that bank deposits react to
interest rate changes. According to Yung (2014), interest rate can explain exchange rate fluc­
tuations. The study of Andrieș et al. (2017) confirms the relationship between foreign currency
and interest rates.
To sum up, as paid attention by the above studies, interest rate can potentially affect the stock
and foreign currency markets as well as bank deposits. However, this potential might be limited
by a governance structure influenced by religion.
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In the second part of the literature, we pay attention to the effects of the markets on economic
growth. Economic development is a development in financial resources. In other words, eco­
nomic development depends on the measure of having access to financial resources. Because,
the society’s mobilization towards decreasing vulnerability and reaching a sustainably favorable
economic growth is affected by financial resources. Given the potential effects of financial
development on economic growth, it is an important aspect of economic development, in­
cluding the development of the stock market, banking sector, and the role of the Central Bank
(Levine, 2005, 1999).
Inflation can potentially affect economic growth, considering its effects on manufacturing
sector by the channels such as the costs of wage growth and imported input, products sale value,
consumer’s purchasing power, Labors’ real wage, the attraction of investing in speculative
activities or productive ones, net exports, and finally the measure of uncertainty in an economic
environment (Dorrance, 1963; Roncaglia de Carvalho et al., 2018; Sadeghi et al., 2022). Some
studies such as Sequeira (2021), Mandeya & Ho (2021), Habib et al. (2017), Coşkun et al.
(2017), Beck & Levine (2004), and Ngare et al. (2014) found out that inflation affects economic
growth negatively. In contrast, the studies of Benczúr et al. (2019) and Botev et al. (2019) show
that inflation has positive effects. Marques et al. (2013) reached the considerable share of in­
flation in the economic growth fluctuations. The study of Pradhan et al. (2015a,b) shows there is
a bidirectional relationship between inflation and economic growth.
Regarding Greenbaum et al. (2019), Levine (1999, 2005), and Sadeghi et al. (2022), the
financial intermediaries affect the real sectors of an economy by the channels such as trans­
parency, asymmetric information, facilitation, risk management, costs of having access to in­
vestment opportunities, and finally the attraction and allocation of financial resources to
productive economic activities. In other words, the mobilization of financial resources from
investors to productive economic projects, evaluation of various projects, and transparent in­
formation about investors, loan applicants, firms’ situation and their profitability outlooks. The
cases mentioned above, considerably matter to the medium-sized and the micro-sized firms
probably having no sufficient access to the above possibilities. Dindo et al. (2022), Inekwe
(2021), Nguyen et al. (2022), and Barra & Zotti (2022) have an emphasis on the linkage be­
tween the financial intermediaries and economic growth.
Brown et al. (2017), Coşkun et al. (2017), Aali-Bujari et al. (2017), Ngare et al. (2014), and
Beck & Levine (2004) confirmed the positive effect of the stock market and banking sector on
economic growth. Sadeghi et al. (2022) found out that the stock market and banking sector
positively affect economic growth by investment. In contrast, some other studies like Narayan
& Narayan (2013), Lee (2012), and Mushtaq (2016) concluded that there was no relationship
between the stock market, banking sector, and economic growth. Benczúr et al. (2019), and
Narayan & Narayan (2013) found out that financing by banking sector affects economic growth
negatively, whereas financing by the stock market shows positive effects. The study of
Lerskullawat (2017) shows the stock market affects economic growth positively, whereas
banking sector has no significant relationship with economic growth. Marques et al. (2013)
conclude that the share of the stock market is greater than banking sector in the fluctuations of
economic growth. Jedidia et al. (2014) shows that the stock market has no positive impact on
economic growth, whereas banking sector does. According to Naceur & Ghazouani (2007),
there is a negative relationship between both banking sector and stock market with economic
growth.
The finance issue is a priority for various sectors of an economy. The reliance of economies’
finance is on the markets or on banking sector, bank-oriented or market-oriented (Levine, 2002).
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The finance system of high-income economies is highly depended on the markets (Demirgüç-
Kunt & Levine, 1999), whereas it is slightly relied on the markets in developing countries
(Sadeghi et al., 2022). There is a likely competition between the financial intermediaries of the
stock market and banking sector to take more investors’ attentions. To absorb more financial
resources, they offer more financial services and investment opportunities (Mattana &
Panetti, 2014).
On the other hand, not only there can be no substitutive relationship between the stock
market and banking sector, but they might complement each other. According to Adrian & Shin
(2010), banking sector can have some positive effects on the stock market due to its role in
financing. In addition, banking sector might affect the stock market positively by investing in
the market. The stock market and banking sector make more financial resources possible for
corporations. The stock market can cover the weakness of banking sector in financing by issuing
more shares. In contrast, banking sector also can potentially cover the weakness of the stock
market by attracting more deposits. Necessary to say that some firms have the high dependence
to the stock market or banking sector’s financial resources. So, in the event of a weak financing,
the outlook of profitability will negatively be affected (Lin, 2020). Another view believes that
an overconcentration only on the one of the stock market or banking sector causes the pro­
ductive economic activities not to have access to more substitute financial resources. Conse­
quently, economic growth will negatively be affected (Chu, 2020; Moghadam & Vinals, 2010).
The price instability can cause some speculative incentives to make the short-term profits by
capital gains. Following that, some financial markets find enough attraction to take investors or
speculators’ attentions, one of which is the CM if there are high volatilities. Sadeghi et al.
(2022) learned that the high fluctuations of foreign currency rates could turn the CM into a
substitute for the financial intermediaries. In this regard, Allen & Gale (1997) pointed out what
mattes to investors is the risk of any of various asset forms. If they expect more gains from
speculation in a market, they would prefer that market to the others. However, they should take
a point into their accounts if making such decision. Speculation needs some equipment such as
the economic and political information, sufficient knowledge and experience. Hence, partici­
pating in such activities is accompanied with taking some risk. In summary, they choose a
market by evaluating the risk measure and the profitability outlook.
The CM links the domestic economy to the world’s economies (Comunale & Simola, 2018).
Hence, numerous studies paid attention to the importance of the CM (Aisen et al., 2021; Nasir
et al., 2020; Osbat et al., 2021). There are some different discussions about how economic
growth is probably affected by the CM. Some pay attention to the likely destructive effects of a
rise in foreign currency rate on the real sectors of an economy, considering its impacts on the
measure of uncertainty in an economic environment and inflation (Hsu et al., 2022; Bahmani-
Oskooee and Hajilee 2016). Ramoni-Perazzi & Romero (2022) as well as Habib et al. (2017)
reached the negative effects of an increase in foreign currency rate on economic growth. Ac­
cording to Iqbal et al. (2023), the exchange rate misalignment affects economic growth nega­
tively. Manalo et al. (2015) found out that a reduction in foreign currency rate did not affect
economic growth positively. Some others discuss that the effects of a change in foreign cur­
rency rate on an economy might be different due to corporations’ structures. More in detail, how
much an economy is affected by the foreign currency rate changes, depends on the volume of
tradable goods in the consumer’s basket. If an economy has a large share of imported input and
intermediate goods in their production process, it will likely be more affected by the currency
rate fluctuations, As pointed out by some studies such as Şen et al. (2020), and Choudhri &
Hakura (2015).
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According to GDP = C + I + G + NX; in addition to net exports (NX) affected by the

volatility of foreign currency rate, being affected the consumption (C) and investment (I) de­
pends on the measure of the reliance of domestic firms as well as demand sector on imported
input and final consumer products (Bahmani-Oskooee & Hajilee, 2016, 2013; Chiu & Sun,
2016; Dao et al., 2021).
Thierry et al. (2016) show there is no relationship between foreign currency rate and eco­
nomic growth. In contrast, Pradhan et al. (2015a); b) found out there could be a bidirectional
relationship between them. In this regard, Bahmani-Oskooee & Hajilee (2010, 2013) came to
conclusion that there might be negative, positive, or even insignificant relationships. The study
of Habib et al. (2017) as well as Coşkun et al. (2017) show that the rise in foreign currency rate
affects economic growth negatively.

4. Methodology specification

Sufficient financial resources matter to realize the targeted economic growth. In economies
such as Argentina and Iran existing a high average of inflation, and that most parts of the
economies have continuously faced with insufficient financial resources, it finds more im­
portance. Hence, the mobilization of financial resources towards the stock market, banking
sector, and or other financial markets like the CM could differently affect economic growth,
considering the role of the financial intermediaries of the stock market and banking sector in
supporting productive projects. Hence, the money flow amongst the markets matters to the real
sectors of an economy. On the other hand, given the potential of interest rate in affecting any of
the markets mentioned above, it has a key role in the realization of having access to sufficient
financial resources by influencing the money flow amidst the markets. Regarding interest rate, it
is an institutional instrument in addition to a monetary policy instrument. As discussed in
section 2, interest rate is affected by a political structure influenced by religion. Hence, we
chose two economies with different political structures. In Argentina, the government is not
influenced by religion and its limitations on freely using interest rate. For Iran, the situation is
totally different. More specifically, Iran’s political structure is profoundly influenced by religion
and its sensitivity to interest rate. In other words, Iranian Central Bank deals with high lim­
itations in freely using interest rate. In fact, the religion in Iran causes the repression of in­
terest rate.
According to the above discussion, we first assess the probable causalities between the fi­
nancial markets by employing Granger-causality tests. In this way, we find out whether or not
there is money flow between the markets. Then, the effect of different political structures in­
fluenced or not influenced by religion on economic growth is examined by the channel of
interest rate effects on the markets. For this, we use Granger-causality tests to learn if there are
causal linkages from interest rate to the markets. Finally, the effects of the stock market, bank
deposits, the CM, and inflation on economic growth are investigated by Markov-Switching
models for 1988–2018. Necessary to say that not having access to the data 2019–2022 made us
not consider these years.
We take the regime changes into account, considering some abrupt changes of economic
growth in Argentinian and Iranian economies. Hence, we employ regime-switching models, as
Hamilton (1989) did due to the same reason. The following regime-switching models is defined:

GDP t = b1 + b2, St GDP t-1 + b3, St FS t + b4, St FB t + b5, St CM t + b6, St INFt + b7 INV t + b8 H t
(1)

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GDP t = b1 + b2, St GDP t-1 + b3, St FSt + b4, St FBt + b5, St CMt + b6, St INFt + b17 INVt + b18 Ht + b19 OILt
(2)

Where St showing regimes (Boom and Recession), taken into account for the variables af­
fected by the regimes. The regimes are considered exogenous. Equations 1 and 2 are for Ar­
gentina and Iran in order. The only different between the equations is using oil export earnings
(OIL) for Iran due to the high share of oil export earnings in Iranian net exports and economic
growth. For both countries, the equation of economic growth (GDP) including the financial
intermediaries of the stock market (FS) and bank deposits (FB). In addition, regarding the high
volatility of the CM and inflation in the both economies, we consider the foreign currency (CM)
and inflation rates (INF). Investment (INV) and human capital (H) are the other variables used
in the both models.
Markov switching models were firstly introduced by Goldfeld & Quandt (1973), and then
developed by Hamilton (1989, 1994). In these models, the effects of variables can be regime-
depended. In this regard, given that is assumed the endogenous variable changes happen in two
regimes, we have:
B1 Z t + £t , if St = 1 &
Rt
B2 Z t + £t , if St = 2 & (3)
Where Rt is a vector of endogenous. Zt is a vector of exogenous variables whose effects on
the dependent variable can be influenced by the regimes. St is also the regime or state variable
that is exogenous and unobserved, and follows Markov’s first-order process. Finally, £t re­
presents the disturbance terms (Frömmel, MacDonald & Menkhoff, 2005). The transition
probability matrix shows the probability of persistence in one regime (P11, P22), and the
probability of transition from one regime to another one (P12, P21):
P11 P21
P=
P12 P22 (4)
Pij = Pr(St = j / St 1 = i) (5)
2
Pij = 1 for all i , j = 1, 2
j=1 (6)
The Markov-switching models are estimated with the maximum likelihood process:
1 (yt B0 Xt Bi )2
i, t = f (yt | st = i, t 1; )= exp 2
2 2 2 i
(7)
Where t 1 shows the information of previous period, and θ is the vector of the estimated
parameters (Bahloul et al., 2017).

5. Empirical results

At first, we are supposed to learn if there is any probable relationship between the financial
markets in Iranian and Argentinian economies. For this purpose, after using Granger-causality
tests, according to Tables 3 and 4, we found out that there were the bidirectional (for Iran) and
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Table 3
Granger Causality Tests for Iran.
Null Hypothesis F-Statistic Prob

FS does not cause CM 4.10546 0.0287

CM does not cause FS 5.65391 0.0094
FB does not cause CM 0.84133 0.4430
CM does not cause FB 3.49086 0.046
FB does not cause FS 4.12243 0.0284
FS does not cause FB 7.35185 0.0031
Note: FS and FB are the financial intermediaries of the stock market and bank deposits. CM is
the foreign currency market.

Table 4
Granger Causality Tests for Argentina.
Null Hypothesis F-Statistic Prob

FS does not cause CM 1.72773 0.1991

CM does not cause FS 2.87181 0.0762
FB does not cause CM 1.76595 0.4430
CM does not cause FB 10.6834 0.0005
FB does not cause FS 7.86158 0.0024
FS does not cause FB 0.23709 0.7907
Note: FS and FB are the financial intermediaries of the stock market and bank deposits. CM is
the foreign currency market.

unidirectional (for Argentina) causalities between the stock market, bank deposits, and the CM.
More specifically, except for bank deposits which does not cause the CM, we reached the strong
results showing strong relationships between the financial markets in Iran. The same as Iran,
there are some strong relationships between the markets in Argentina. However, the causalities
are unidirectional. An interesting earning is that the financial intermediaries of the stock market
and banking sector are also affected by each other’s changes in Iran. For Argentina, the causal
linkage is from banking sector to the stock market. The causal linkages are shown in Fig. 3.
After making sure of the existence of the causalities between the financial markets, we
examine the effects of the stock market, bank deposits, foreign currency rate, and inflation on
economic growth. For this aim, as datasets are annual including 30 observations, maximum
number of four lags and two regimes are considered. The economic growth of Iranian and
Argentinian economies has not been accompanied with stability, showing high volatility.
Hence, we take into account the regime changes for the two countries.
As we consider the regime changes, to test the existence of unit root, is used by the
Augmented Dickey-Fuller (ADF) min-t including break points. According to Tables 5 and 6, no
unit root was found for the variables used in the models at the significance level of 5 %. Then,

Fig 3. The Causalities amongst the stock market (FS), banking sector (FB), and the foreign currency market (CM). the
causal linkages are shown in blue for Iran, and in green for Argentina.

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Table 5
ADF test for Iran.
Variables t-Statistic Critical Values Results

GDP 4.467490 2.963972 Stationary

INV 4.656435 2.963972 Stationary
INF 3.544068 2.963972 Stationary
FS 5.673608 2.963972 Stationary
FB 5.420947 2.963972 Stationary
CM 4.830649 2.963972 Stationary
OIL 5.996504 2.963972 Stationary
H 4.362273 2.963972 Stationary
Note: The Null hypothesis of ADF test is non-stationary, or the existence of a unit root.

Table 6
ADF test for Argentina.
Variables t-Statistic Critical Values Results

GDP 5.139856 4.443649 Stationary

INV 5.796749 4.443649 Stationary
INF 1.232503 4.443649 Stationary
FS 7.786161 4.443649 Stationary
FB 5.498737 4.443649 Stationary
CM 8.857783 4.443649 Stationary
H 7.778806 4.443649 Stationary
Note: The Null hypothesis of ADF test is non-stationary, or the existence of a unit root.

whether or not we need to consider the regime changes, is investigated by the likelihood ratio
(LR) test. According to Table 7, the LR test results show that the regime changes should be
taken into account.
Given that there are various kinds of Markov regime-switching models, it is necessary to
choose one of them considering some criteria_ Schwartz, Log-Likelihood showing the measure
of the model’s explanatory, and the coefficients significance of the regimes and other vari­
ables_. In this respect, the MSMA model (dependence of mean and autoregressive coefficients
on the regime) was selected to investigate the effects of the stock market, bank deposit, the CM,
and inflation on economic growth in the both regimes of boom and recession of economic
growth. The estimation results are separately presented in Tables 8 and 9 for Iran and Argentina.
According to Tables 8 and 9, regimes (1) are set as the boom regimes due to higher means,
and regimes (0) are considered as the recession regimes for both countries, i.e., Iran and Ar­
gentina. For Iran, given Table 8, in the both regimes, bank deposits have positively affected
economic growth, and its effects have been higher in the recession regimes. Given the dis­
cussion presented in section 2, the positive effects of bank deposit are not as expected, espe­
cially in the boom regimes. More specifically, we expected the negative effect. Because, the real

Table 7
LR tests for Argentina and Iran.
Chi-Squared Statistic Prob

Argentina 36.334 0.000

Iran 87.706 0.000
Note: The Null hypothesis of LR test is the necessity of not considering the regime changes.

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Table 8
The estimation results of equation GDP for Iran.
Variables Coefficient Std. Error Prob

Regimes Reg (0) Reg (1) Reg (0) Reg (1) Reg (0) Reg (1)

Constant 0.01586 0.06373 0.00280 0.00450 0.017 0.009

FB 0.04610 0.01145 0.00779 0.00047 0.020 0.000
CM - 0.0039 - 0.0090 0.00030 0.00107 0.001 0.018
FS 0.02444 0.04702 0.00142 0.00341 0.002 0.003
INF - 0.07247 - 0.39734 0.00494 0.02216 0.000 0.004
AR-1 - 1.52361 - 0.71923 0.09284 0.1280 0.001 0.017
AR-2 - 1.92561 0.77689 0.1079 0.09469 0.001 0.007
AR-3 - 1.59349 0.14573 0.1209 0.09739 0.003 0.292
AR-4 - 0.84461 - 0.84461 0.1221 0.1221 0.022 0.005
OIL 0.05527 0.00187 0.000
H - 0.07175 0.00609 0.003
INV 0.03314 0.00512 0.008
Transition matrix and the average of persistence years P00: 0.87497 P10: 0.27278
P01: 0.12503 P11: 0.72722
Note: AR-1, AR-2, AR-3, and AR-4 show the lags of economic growth. FS, FB, OIL, CM, INV, and H are in order: the
stock market, bank deposits, oil exports, foreign currency market, investment, and human capital. The transition
probability matrix shows the probability of persistence in a regime (P00, P11). In addition, the probability of transition
from a regime to another one (P01, P10). The average duration of each recession is 5.67 years, and for the boom is 3.33
years. 62.96 % of the years, economic growth was in the recession, and 37.04 % in the boom.

Table 9
The estimation results of equation GDP for Argentina.
Variables Coefficient Std. Error Prob

Regimes Reg (0) Reg (1) Reg (0) Reg (1) Reg (0) Reg (1)

Constant 0.00356 0.00854 0.0007 0.0002 0.004 0.000

FB - 0.157 - 0.286 0.0177 0.0085 0.000 0.015
CM - 0.0006 0.03986 0.0045 0.0035 0.898 0.000
FS - 0.0151 0.02292 0.007 0.0083 0.074 0.033
INF - 0.0037 - 0.00852 0.0005 0.0012 0.000 0.000
AR-1 0.2939 2.6406 0.0619 0.4012 0.003 0.001
AR-2 - 0.6042 1.4403 0.0561 0.1433 0.000 0.000
AR-3 0.784 0.3111 0.0909 0.0584 0.000 0.002
H - 0.03204 0.01102 0.027
INV 0.36037 0.00488 0.000
Transition matrix and the average of persistence years P00: 0.80 P10: 0.33335
P01: 0.20 P11: 0.66665
Note: AR-1, AR-2, and AR-3 show the lags of economic growth. FS, FB, CM, INV, and H are in order: the stock
market, bank deposits, foreign currency market, investment, and human capital. The transition probability matrix shows
the probability of persistence in a regime (P00, P11). In addition, the probability of transition from a regime to another
one (P01, P10). The average duration of each recession is 4 years, and for the boom is 2.75 years. 59.26 % of the years,
economic growth was in the recession, and 40.74 % in the boom.

interest rates of bank deposits have been negative due to the repression of interest rate in the
most years of the under-review period. as pointed out before, the repression originates from a
political structure influenced by religious limitations and sensitivities to interest rate. Therefore,
the risk of investing in bank deposits causes the inadequately finance of productive parts.

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Hence, we expected economic growth to be harmed by the negative effects of the interest rate
repression on the attraction of bank deposits for investors. A probable explanation concerns the
depositors’ money illusion. More specifically, they pay more attention to the nominal interest
rates than real ones. Whereas they have been paying the inflationary tax, considering the ne­
gative real interest rate of deposits.
For Argentina, according to Table 9, in the both regimes, bank deposits show negative
effects on economic growth, and its effects have been higher in the recession regimes. We had
no expectation about the effect of bank deposits in advance. Because, although the volatility of
inflation has been annoyingly high in Argentina which makes investing in bank deposits risky
for investors, Argentinian Central bank almost proportionally responded to the inflation vola­
tility, as discussed in section 2.
Nevertheless, bank deposits indicate the negative effects. Whereas the Central bank does not
deal with the limitations of religion on interest rate in Argentina. Thus, the interest rate re­
pression does not make the Central bank passive against the inflation volatility. In sum, it seems
the strength of high volatility in inflation has a considerable share on the negative effect of bank
deposits on Argentinian economic growth.
In Iran, the stock market has positively affected economic growth in the both regimes.
Unlike bank deposits, the effects of stock market have been greater in the boom regime as we
expected. Because, in the periods of high economic growth, due to the prosperity of economic
activities and investment, the earnings and profitability of the firms listed on the stock market
improve. Then, they assign more money to investment on the development plans and product
activities that would positively affect economic growth.
Therefore, the result is consistent with our expectation. In contrast, the CM show negative
effects in the both regimes of Iranian economic growth. For Argentina, the stock market shows
positive effects in the recession regimes, whereas its effects are insignificant in the recession
regimes. On the other hand, the same as the stock market in Argentina, the CM also indicates
insignificant effects in the recession regimes, and positive effects in the boom regimes.
The inflation rate shows negative effects on economic growth in the both regimes of the two
countries. Its negative effect has been greater in the boom regimes of Argentinian and Iranian
economic growth. The negative impacts are consistent with our expectation. As pointed out in
section 2, the two countries have faced the high volatility of inflation. An explanation relates to
people’s purchasing power negatively affected by high volatility in inflation. In addition, more
uncertainty following the inflation volatility, harms investment and economic growth.
The transition matrixes show that the persistency probabilities of the recession regimes are
very high compared to the boom regimes_ an average of 5.67years and 62.96 % of the interval
for Iranian recession regimes, and an average of 4years and 59.26 % of the period for
Argentinian recession regimes versus an average of 3.33years and 37/04 % of the interval for
the boom regimes in Iran, and an average of 2.75years and 40.74 % of the period for Argentina.
In addition, the probability of a transition from the recession to boom regime has been very low,
12 % for Iran and 33 % for Argentina.
To sum up, we found out that there were bidirectional and unidirectional causalities between
the stock market, banking sector, and the foreign currency market in the both countries. On the
other hand, we learned that Argentinian and Iranian economic growth rates are affected by the
markets. In the following, we are supposed to see if interest rate affects the markets at which we
deal with the two countries with different political structures. We have Iran’s political structure
influenced by religion versus Argentinian political structure not influenced by religion. In other

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Table 10
Granger Causality Tests for Iran.
Null Hypothesis F-Statistic Prob

IR does not cause CM 3.13913 0.0608

IR does not cause FS 1.86455 0.1759
IR does not cause FB 0.38637 0.6835
Note: FS and FB are the financial intermediaries of stock market and bank deposits. CM is
the incentives of speculation in the foreign currency market resulting from the gap between
foreign currency rates. IR is the monetary policy instrument of the Central Bank.

words, Iranian Central Bank faces religious limitations and sensitivities to freely using interest
rate, whereas Argentina’ Central Bank does not encounter such religious limitations.
This aim matters to the economies as the relationship between the markets and interest rate
can affect the measure of having access to sufficient financial resources. Regarding the potential
effects of interest rate on the condition of the stock market (corporations’ having access to
financial resources and borrowing cost), bank deposits (the attraction of investing in deposits),
and the value of national currency (its effects on the motivations of borrowing, lending, and
investment), we expect the Central Banks potentially impact the money flow between the
markets to positively affect economic growth by using its monetary policy instrument of interest
rates. In this regard, we assess the relationship between interest rate and the markets by applying
the Granger-causality tests for Iranian and Argentinian economies.
According to Table 10, there is not any causality from interest rate to the stock market, bank
deposits, and the CM in Iran. Whereas mentioned above, we expected the strong causalities
between the markets and interest rate based on the potential effects of interest rate on each three
markets. The lack of the causalities concerns the political structure governing in Iran. As dis­
cussed in section 2, Iranian political structure is influenced by religion. Hence, Iran’s Central
Bank cannot freely use the monetary policy instrument of interest rate due to religious sensi­
tivities to interest rate. In other words, the repression of interest rate originated from religious
limitations causes the interest rate potential not to be realizes in Iran’s economy.
The issue that Argentinian Central bank does not face with that. As shown in Table 11, there
are strong causalities between interest rate and all the markets in Argentina’s economy. As
pointed out in section 2, Argentinian Central bank responds to the inflation volatility pro­
portionally. A political structure not influenced by religious limitation causes the potential of
interest rate to be realized in Argentinian economy. Given the complications of the relations,
showing the results in a figure makes it more understandable. Hence, we sum up the results in
Fig. 4. As shown in Fig. 4, there are causal linkages between the markets in Argentina and Iran,

Table 11
Granger Causality Tests for Argentina.
Null Hypothesis F-Statistic Prob

IR does not cause CM 3.41001 0.0497

IR does not cause FS 4.14713 0.0284
IR does not cause FB 13.6463 0.0001
Note: FS and FB are the financial intermediaries of stock market and bank deposits. CM is
the incentives of speculation in the foreign currency market resulting from the gap between
foreign currency rates. IR is the monetary policy instrument of the Central Bank.

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Fig 4. The causalities between the markets, between the markets and economic growth (GDP), and between the
markets and interest rate are shown by blue arrows for Iran and green arrows for Argentina. We showed the effects of
interest rate (IR) repression by the red signs for Iran’s economy due to religious limitations. As clear, there is not any
causality from interest rate to the stock market (FS), banking sector (FB), and the foreign currency market (CM) in
Iranian economy. Whereas there are strong causal linkages between interest rate and each three markets in Argentina.
As shown by green arrows, Argentinian Central Banks can positively affect the economic growth through the re­
lationship between the markets by changing interest rate proportioned with economic conditions. Whereas there is no
such a possibility for Iranian Central Bank due to the limitations of religion, despite there are strong causal linkages
between the markets, and between the markets and the economic growth, as indicated by blue arrows.

and the markets affect economic growth in the both countries. In addition, interest rate affects
the markets in Argentina, whereas it does not have causal linkage to the markets in Iran, shown
by red sign in Fig. 4. Hence, Argentinian Central Bank can affect economic growth by pro­
portionally changing interest rate with the inflation volatility to suitably affect the money flow
between the market. Whereas, there is not such a possibility for Iranian Central Bank due to the
interest rate repression originated from religious limitations.

6. Discussion

We are supposed to discuss how a different political structure influenced by religion can
affect economic growth by the linkage between the financial markets and interest rate. in this
regard, we chose two countries with different political structures from being influenced by
religion. In Iran, a political structure governs influenced by religion, whereas there is not such a
structure in Argentina. Hence, Iranian Central bank is faced with some religious limitations on
freely using interest rate proportioned to economic situation, called the repression of interest
rate. in contrast, Argentinian Central banks does not deal with such limitations to proportionally
use its monetary policy instrument of interest rate. on the other hand, some similarities re­
garding the two countries motivated us to choose Argentina and Iran, including the high vo­
latility in the foreign currency markets, economic growth and inflation rates, lying amongst the
developing economies, and the high share of banking sector compared to the stock in financing.
In addition, a profound difference between the responses of the two countries’ Central Banks to
the inflation volatility caused us to choose these economies.
First, we found out that there were strong linkages between the stock market, banking sector,
and the foreign currency market and in the both countries, showing a money flow between the
markets. As Blau (2018), Mahapatra & Bhaduri (2019) reached the same regarding the linkage
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between the stock and currency markets. Abbassi & Bräuning (2023), and Sadeghi et al. (2022)
got to a linkage between the foreign currency market and banking sector. Second, we learned
that all the markets affect economic growth in the both countries. In addition, the effects of the
markets are regime-dependent. Dindo et al. (2022), Inekwe (2021), Nguyen et al. (2022), Barra
& Zotti (2022), and Aali-Bujari et al. (2017) did reach the same linkage between the financial
intermediaries of the stock market and banking sector and economic growth. The studies of Hsu
et al. (2022), Ramoni-Perazzi & Romero (2022), Habib et al. (2017) as well as Coşkun et al.
(2017) show a linkage between the CM and economic growth. Abbassi & Bräuning (2023)
discuss that the real sectors of an economy can be affected by the relationship between financial
markets. Third, we paid attention to the likely effects of different political structures on eco­
nomic growth by the channel of the relationship between the markets. The best of our
knowledge, it is the first effort to assess such a topic. In this respect, we considered Iran with a
political structure influenced by religion, showing its effects on the limitations of the Central
Bank in freely using interest rate due to the religious sensitivities. On the other hand, there is an
economy with a political structure not influenced by religion, i.e., Argentina. We concluded that
there are no causal linkages from interest rate to the markets in Iran’s economy due to the
repression of interest rate originated from religious limitations. Whereas there are strong
causalities from interest rate to the markets in Argentinian economy.
As a result, Argentinian Central Bank can affect economic growth through the money flow
between the markets by freely changing interest rate proportioned with the economic situation.
Whereas there is no such a possibility for Iran’s Central Bank. In other words, an active Central
bank against the inflation volatility in Argentina versus a passive Central Bank in Iran is one of
the consequences of the interest rate repression in a political structure influenced by religion.
This result finds more importance when we are in knowledge of the considerably high volatility
of inflation rates in the both countries, as discussed about the inflation volatility in section 2. In
addition, based on the estimations, inflation rates show negative effects on economic growth in
the both economies. Hence, the timely and proportionally responses of the Central Bank are
vital in the both countries.

7. Conclusion and policy implications

This study assesses the effects of different political structures on economic growth by the
effects of interest rate on the linkage amongst the stock market, banking sector, and foreign
currency market. For this purpose, we chose two countries with different political structures:
Argentina with a political structure not influenced by religion versus a political structure in­
fluenced by religion in Iran. We employed Granger-causality tests and Markov-switching
models for 1988–2018.
The results show that the financial markets affect economic growth in the both countries. In
addition, there are strong causal linkages between the markets in the both countries, showing the
money flow between the market in Argentinian and Iranian economies. On the other hand, there
are strong causalities from interest rate to the markets in Argentina, whereas interest rate shows
no causal linkages to the markets in Iran. The political structure governing in Iran makes the
Central Bank passive against the inflation volatility. The passivity of Iran’s Central Bank is
originated by religious limitations on interest rate. Whereas Argentinian Central Bank does not
face such religious limitations on interest rate due to a political structure not influenced by
religion. Hence, Argentina’s Central Bank can freely and proportionally respond to the vola­
tility of inflation, whereas there is not such a possibility for Iran’s Central Bank.
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This issue finds a key importance as there are the high volatility of inflation in the both
countries, and inflation affects economic growth negatively in the both economies. Hence, the
timely and proportionally responses of the Central Bank to the inflation volatility are vital for
the two countries. Because, given the linkage between the markets, and the effects of the
markets on economic growth, the Central Bank can suitably affect economic growth by freely
and proportionally responding to the inflation volatility to affect the money flow between the
markets. Although there is this possibility for Argentinian Central Bank to positively affect
economic growth by freely changing interest rate proportioned with the volatility of inflation
rate, there is no such a possibility for Iranian Central Bank due to the repression of interest rate
originated from religious sensitivities. Regarding the key role of the financial markets such as
the stock market and banking sector in sufficiently financing the productive sectors of the
economies, and being affected the money flow between the markets by the relationship between
inflation and interest rates, it is necessary for policy makers and authorities to grant enough
autonomy to the Central Bank to actively respond to the volatility of inflation by its monetary
policy instrument of interest rate. the autonomy that is not shown in Iran due to religious
limitations. For Argentina, although the Central Bank responds to the inflation volatility pro­
portionally, it needs to take more steps in this regard for lowering the volatility of inflation rate
and taking advantage of the linkage between the markets to realize of sufficiently having access
to financial resources. In addition to policy makers and authorities, the results of this study can
present some financial implications to investors. As stocks, deposits, and foreign and national
currencies can lie in investors’ portfolios, they should take into accounts the relationship be­
tween interest and inflation rates. Having enough knowledge in this regard can hedge the risk of
investing in any of the markets.

Declarations

We are not an official representative or on behalf of the government. We do not have any
dependence on the government or organization which is on the USA sanction list. All data is
available if it is necessary to send. The authors have no affiliation with any organization with a
direct or indirect financial interest in the subject matter discussed in the manuscript. Plus, this
manuscript has not been submitted to another journal or other publishing venue. It is needed to
state that this study has not been funded by any institution or government.

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