Macroeconomic Policy Coordination & Implications for Financial Markets in a Bayesian VAR Framework

Abstract

This study analyses the implications macroeconomic policy coordination for the financial stability in the United Kingdom. We also considered the aspect of Global Financial Crisis (GFC) and its implications for the macroeconomic policy interaction and its impact on the financial sector. Employing a Bayesian Vector Auto-regressive (BVAR) model and monthly data from Jan 1985 to June 2016, our key findings suggest that the macroeconomic policy interaction and interdependence is significantly important for the financial markets in the United Kingdom. In the Post-GFC period, we found significant evidence of change in the response of stock and bond markets to each other which have important implications in terms of portfolio adjustment. The argument in the support of policy coordination for the financial stability was found to be robust. A profound practical implication of this study is the positive aspects of Jeffreys-Lindley’s paradox and the possibility of employing the Frequentist and Bayesian estimation techniques as complementing rather competing frameworks.