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

Muhammad Ali Nasir, Milton Yago, Alaa M. Soliman, Junjie Wu

Research output: Contribution to journalArticle

1 Citation (Scopus)

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.

Original languageEnglish
Article number1136098
JournalCogent Economics and Finance
Volume4
Issue number1
DOIs
Publication statusPublished - 1 Feb 2016
Externally publishedYes

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