Possible effects of the stock market movements on interest rates, output and inflation: empirical evidence from the emerging markets of Europe

It is important to identify the effects of stock prices on financial and macroeconomic variables when the development of capital markets is concerned. In this study, AB type-SVAR models are employed, whereupon impulse response functions (IRFs) and forecast error variance decompositions (FEVDs) are used for determining the effects of stock prices on money market interest rates, industrial production and inflation expectations and in the emerging markets of Central and Eastern European (CEE) countries. Empirical results stress that central banks in these countries should incorporate the role of capital markets into their monetary policy formulations for maintaining price stability. It is also implied that development of capital markets in these countries should be fostered by the implementation of policies both on micro and macro basis for sustaining economic development.