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

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  • Muhammad Ali Nasir

    (Leeds Beckett University)

  • Alaa M. Soliman

    (Leeds Beckett University)

  • Muhammad Shahbaz

    (Beijing Institute of Technology
    University of Cambridge
    COMSATS University of Islamabad, Lahore Campus)

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.

Suggested Citation

  • Muhammad Ali Nasir & Alaa M. Soliman & Muhammad Shahbaz, 2021. "Operational aspect of the policy coordination for financial stability: role of Jeffreys–Lindley’s paradox in operations research," Annals of Operations Research, Springer, vol. 306(1), pages 57-81, November.
    • Handle: RePEc:spr:annopr:v:306:y:2021:i:1:d:10.1007_s10479-020-03648-y
    DOI: 10.1007/s10479-020-03648-y
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    More about this item

    Keywords

    Macroeconomic policy operation; Financial markets; Macroeconomic policy interaction; Bayesian estimation; Jeffreys–Lindley’s paradox; Operations research;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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