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Title: Macroeconomic policy interaction ; state dependency and implications for financial stability in United Kingdom
Author: Nasir, Muhhammad Ali.
ISNI:       0000 0004 5348 4395
Awarding Body: Leeds Beckett University
Current Institution: Leeds Beckett University
Date of Award: 2014
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The association between economic and financial stability and influence of macroeconomic policies on financial sector creates scope of active policy role in financial stability. Nevertheless, relying on single policy is not the best scheme as recent studies emphasises on coordinated monetary and fiscal efforts for economic stability. However, existing literature on the subject does not provide much insight into the association between macroeconomic policy coordination and financial stability. Prime objective of macroeconomic policies has been to achieve the economic stability in the form of economic growth, price stability and employment. As a contribution to existing body of knowledge, this study has analysed the implications of macroeconomic policy interaction and coordination for financial stability, proxied by financial assets i.e. equity and bonds price oscillation. The empirical analysis employing a Vector Autoregressive (VAR) model suggests that an accommodating monetary and disciplined fiscal stance has been optimal for stock as well as bond markets. 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. This study also analysed the symmetry of financial markets responses to macroeconomic policy interaction. It was found that in response to macroeconomic policy interaction the equity and bond markets showed homogenous and identical symmetry. To test the robustness of our optimal policy combination and overcome the limitation of a single empirical approach (Jeffrey-Lindley's paradox), In addition to the VAR model estimated by Frequentist approach this study also employed an NK-OSGE framework with Bayesian estimation. Empirical results obtained from alternative empirical approaches complemented each other and absence of policy coordination found to be damaging for financial stability. In the short-term financial markets showed asymmetric response to optimal policy combination which is a reflection of portfolio adjustment. However, in long term there was evidence homogenous response and co-movement between the financial markets. The optimal policy combination was also analysed in the context of institutional design and major financial events. It was found that macroeconomic policies and even their combination was not very effective during the ERM membership, joining currency union in any form could reduce the capability of local policy makers to coordinate and influence domestic financial sector. Secondly, impact of macroeconomic policies and their combination significantly increased Post-independence of the Bank of England. However, the suggested policy combination was expansionary fiscal and passive monetary policy stance, considering the fact that it has heterogeneous response from the stock and bond markets, unless we are targeting a particular market in the short-run. Hence we can recommend that the intuitional autonomy in the form instrument independence could bring financial stability, however there is strong necessity of coordination even in Post-PMC and the BoE independence. In the Post-Dot Com Bubble and adoption of Consumer Price Index as monetary policy target, monetary policy did not while fiscal policy as well as policy combination did show significant impact on the financial markets. Hence we would have two policy implication and recommendations (a) during the periods of stable economic and financial environment the monetary as well as fiscal policies shows milder individual impact on stock as well as bond markets (b) however the macroeconomic policy combinations remained effective even if the individual influence of macroeconomic policies become less prominent. Consequently, we rule out notion that the monetary policy should only focused on price stability ignoring cooperation with fiscal authority as such a stance also adversely affect financial sector.
Supervisor: Not available Sponsor: Not available
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID:  DOI: Not available