Operational aspect of the policy coordination for financial stability: role of Jeffreys–Lindley’s paradox in operations research

Muhammad Ali Nasir, Alaa M. Soliman and Muhammad Shahbaz
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Alaa M. Soliman: Leeds Beckett University

Annals of Operations Research, 2021, vol. 306, issue 1, No 4, 57-81

Abstract: Abstract This study analyses the implications of Jeffery–Lindley’s paradox and Global Financial Crisis (GFC) for the operational aspect of macroeconomic policy coordination for financial stability. Using a Bayesian Vector Auto-regressive model and data from Jan 1985 to June 2016, our key findings suggest that the claim of macroeconomic policy interaction, interdependence and significance of coordinated policy operations for the financial stability holds its ground. The argument in the support for policy coordination for financial stability was found to be robust against the Jeffreys–Lindley’s paradox and in the Post-GFC era. A profound practical, operational and philosophical 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.

Keywords: Macroeconomic policy operation; Financial markets; Macroeconomic policy interaction; Bayesian estimation; Jeffreys–Lindley’s paradox; Operations research (search for similar items in EconPapers)
JEL-codes: E44 E61 G12 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1007/s10479-020-03648-y

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