Financial and economic stability as ‘two sides of a coin’: Non-crisis regime evidence from the UK based on VECM
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
Acknowledgements
The authors acknowledge and thank Dr Jamie Morgan for his constructive comments which led to significant improvement of the original draft. They also appreciate comments received at BMRC-DEMS Conference on Macro and Financial Economics/Econometrics held in May 2014 at Brunel University, UK, and International Academy of Business and Economics Conference held in July 2014 at University of Verona, Italy.
Citation
Nasir, M.A., Ahmad, M., Ahmad, F. and Wu, J. (2015), "Financial and economic stability as ‘two sides of a coin’: Non-crisis regime evidence from the UK based on VECM", Journal of Financial Economic Policy, Vol. 7 No. 4, pp. 327-353. https://doi.org/10.1108/JFEP-01-2015-0006
Publisher
:Emerald Group Publishing Limited
Copyright © 2015, Emerald Group Publishing Limited