Financial and economic stability as ‘two sides of a coin’

Muhammad Ali Nasir, Mushtaq Ahmad, Ferhan Ahmad and JunJie Wu

Journal of Financial Economic Policy, 2015, vol. 7, issue 4, 327-353

Abstract: Purpose - – The purpose of this paper is to provide a different context for considering issues of financial stability and instability, with reference to economic growth and price stability in particular. Design/methodology/approach - – This paper pursued an empirical exploration of six pillars of financial stability, based on a data set for the UK extending from 1985 (Q1) to 2008 (Q2), through the construction of a vector error correction model, including an impulse response function analysis. Findings - – The findings show a strong association between the financial and economic stability even in a non-crisis regime. This includes, for example, a strong association exists between the stock market and the real economy; exchange rate appreciation may not provide for long-term real economic growth; inflation does not contribute to real economic growth, both the sensitivity of the economy to yields and a significant lag in transitional effects from financial markets to the real sector; a positive role of credit creation within a non-crisis regime; exchange rate appreciation affects purchasing power; and potential points of linkage between sovereign debt activity and general price levels. Research limitations/implications - – The findings should be considered in the context of a concept of the economy as fundamentally dynamic and subject to complex cumulative processes. Practical implications - – The findings indicate there is a role for state oversight and intervention within a non-crisis regime based on the complexity of possible interactions that may undermine financial and price stability, with consequences for their association with economic growth. Originality/value - – The study provides a new perspective for considering issues of financial stability and instability.

Keywords: Financial markets; Economic development: financial markets; Financial markets and the macroeconomy; Financial economics; Foreign exchange; B26; E44; G01 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (14)

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Persistent link: https://EconPapers.repec.org/RePEc:eme:jfeppp:v:7:y:2015:i:4:p:327-353

DOI: 10.1108/JFEP-01-2015-0006

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