Alaa M. Soliman

Financial stability, wealth effects and optimal macroeconomic policy combination in the United Kingdom: A new-Keynesian dynamic stochastic general equilibrium framework

Abstract This study derives an optimal macroeconomic policy combination for financial sector stability in the United Kingdom by employing a New Keynesian Dynamic Stochastic General Equilibrium (NK-DSGE) framework. The empirical results obtained show that disciplined fiscal and accommodative monetary policies stance is optimal for financial sector stability. Furthermore, fiscal indiscipline countered by contractionary monetary stance adversely affects financial sector stability. Financial markets, e.g. stocks and Gilts show a short-term asymmetric response to macroeconomic policy interaction and to each other. The asymmetry is a reflection of portfolio adjustment. However in the long-run, the responses to suggested optimal policy combination had homogenous effects and there was evidence of co-movement in the stock and Gilt markets.

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

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.

Macroeconomic policy interaction: State dependency and implications for financial stability in UK: A systemic review

Abstract 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. 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 Frequentist and Bayesian approaches should be used in commentary manner. The policy interaction and optimal policy combination should also be analysed in the context of institutional design and major financial events to gain insight into the implications of policy interaction in the periods of stable economic and financial environments as well as period of financial and economic distress.