Abstract
AbstractThe association between economic and financial stabilities and influence of macroeconomic policies on the financial sector creates scope of active policy role in financial stability. As a contribution to the existing body of knowledge, this study has analysed the implications of macroeconomic policy interaction/coordination for financial stability, proxied by financial assets, i.e. equity and bonds price oscillation. The critical review and analysis of the existing literature on the subject suggests that there is also ample evidence of interdependence between monetary and fiscal policies and this interrelation necessitates coordination between them for the sake of financial stability. There is also a case for analysing the symmetry of financial markets responses to macroeconomic policy interaction. On methodological and empirical grounds, it is vital to test the robustness of policy recommendations to overcome the limitation of a single empirical approach (Jeffrey–Lindley’s paradox). Hence, the Fr...
Highlights
The association between economic and financial stabilities and influence of macroeconomic policies on the financial sector creates scope of active policy role in financial stability
Particular to the UK economy, Her Majesty’s Treasury (HMT) is responsible for the formulation and implementation of fiscal policy, whereas monetary policy is autonomously formulated by the Bank of England
If we review the literature on the performance of policy framework, institutional design of monetary policy in the UK was praised by Bhundia and Donnell (2002), arguing that independence of central bank and institutional arrangements is based on the principles of credibility, flexibility and democratic legitimacy
Summary
The macroeconomic policy is a vast subject and an important aspect of macroeconomics, perhaps due to its importance as well as its national and international implications it has been given significant attention to. Among very rare studies from the UK which jointly considered the role of monetary and fiscal policies, an investigation by Kirsanova et al (2005) which was limited to a theoretical framework (no empirical validation) argued that the best outcome is achieved when macroeconomic policies are cooperative and monetary policy perform actively for economic stabilization (inflation, output and debt). Among the studies which analysed the impact of intuitional changes in macroeconomic policy framework in the UK, Haldane and Read (2000) investigated the role of monetary policy under the influence of inflation targeting and its effects on the bond market (yield curve). Though this element makes this study prominent from the previous research acknowledged in above lines, in particular to the UK, there is no evidence of this strategy in the subject area of research
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