Aspects of Macroeconomic Policy Combinations and Their Effects on Financial Markets

Economic Issues, Volume 19, No 1, Pages 95 - 118. (2014)

24 Pages Posted: 26 May 2017

See all articles by Muhammad Ali Nasir

Muhammad Ali Nasir

Leeds University Business School (LUBS) - Division of Economics

Alaa M. Soliman

London Metropolitan University - Department of Economics, Finance and International Business (EFIB)

Date Written: 2014

Abstract

This paper analyses the implications of macroeconomic policy interactions for financial stability, proxied by financial assets prices (equity and bonds). The empirical analysis applies a Vector Autoregressive (VAR) model and our findings suggest that an accommodating monetary, and disciplined fiscal, stance has been optimal for both stock and bond markets. There is also ample evidence of interdependence between policies, as an expansionary fiscal policy could persuade the monetary authorities to adopt an accommodating stance, whereas a contractionary monetary policy leads fiscal policy towards consolidation. The interrelation between monetary and fiscal policy necessitates coordination between them for the sake of financial stability.

Keywords: Financial Markets, Macroeconomic Policy Interaction, FTPL, Financial Stability

JEL Classification: E44, E61, G12

Suggested Citation

Nasir, Muhammad Ali and Soliman, Alaa M., Aspects of Macroeconomic Policy Combinations and Their Effects on Financial Markets (2014). Economic Issues, Volume 19, No 1, Pages 95 - 118. (2014), Available at SSRN: https://ssrn.com/abstract=2973771

Muhammad Ali Nasir (Contact Author)

Leeds University Business School (LUBS) - Division of Economics ( email )

Leeds LS2 9JT
United Kingdom

Alaa M. Soliman

London Metropolitan University - Department of Economics, Finance and International Business (EFIB) ( email )

Economics Subject Group, LMBS
London EC2M 6SQ, EC2M 6SQ
United Kingdom

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