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Macro-Financial Links and Monetary Policy Management


  • Nephil Matangi Maskay


For the past few decades, the nature of links between financial conditions and the real macro economy (the macro-financial link) has changed. The links have expanded and deepened significantly due mainly to the following two reasons. Firstly, financial liberalisation has expanded the availability of financial products and services, increasing the connection between financial markets, which in turn, has enhanced the channels through which financial conditions affect the real macro economy. Secondly, financial globalisation has amplified the adverse effect of financial contagion from one country to another, and subsequently, a financial crisis or turmoil in one country tends to easily affect the financial markets and the real macro economy of other countries through the above mentioned macro-financial links. The current US sub-prime mortgage crisis is a case in point of how the US financial crisis adversely affected, not only its domestic financial system and economy, but also the global financial system and economy. However, the current understanding of how the financial conditions affect the real macro economy seems to be insufficient. In particular, it is becoming more important to comprehend how monetary policy influences financial conditions. In light of these issues, this study explores the implication and nature of macro- financial links of SEACEN central bank policies and reviews the experiences of participating countries. The study highlights that the function of allocation of resources in some SEACEN members has expanded and broadened beyond that of the monetary and financial system as a whole. This suggests that monetary policy management needs to be better coordinated and fine-tuned. The paper thus proposes that the country-specific formulation and implementation of monetary policy should be coordinated with financial policy.

Suggested Citation

  • Nephil Matangi Maskay, 2010. "Macro-Financial Links and Monetary Policy Management," Research Studies, South East Asian Central Banks (SEACEN) Research and Training Centre, number rp78, April.
  • Handle: RePEc:sea:rstudy:rp78

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    References listed on IDEAS

    1. Michael B Devereux & James Yetman, 2010. "Financial deleveraging and the international transmission of shocks," BIS Papers chapters,in: Bank for International Settlements (ed.), The international financial crisis and policy challenges in Asia and the Pacific, volume 52, pages 274-298 Bank for International Settlements.
    2. Markus K. Brunnermeier, 2009. "Deciphering the Liquidity and Credit Crunch 2007-2008," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 77-100, Winter.
    3. Byström, Hans N. E., 2005. "Credit Default Swaps and Equity Prices: The Itraxx CDS Index Market," Working Papers 2005:24, Lund University, Department of Economics, revised 15 May 2005.
    4. Don H Kim & Mico Loretan & Eli M Remolona, 2010. "Contagion and risk premia in the amplification of crisis: evidence from Asian names in the global CDS market," BIS Papers chapters,in: Bank for International Settlements (ed.), The international financial crisis and policy challenges in Asia and the Pacific, volume 52, pages 318-339 Bank for International Settlements.
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    Cited by:

    1. Bhattacharyya, Nikhilesh., 2012. "Monetary policy and employment in developing Asia," ILO Working Papers 994685223402676, International Labour Organization.
    2. repec:ilo:ilowps:468522 is not listed on IDEAS
    3. Nephil Matangi Maskay Ph.D. & Rajendra Pandit, 2010. "Macro-Financial Link and Monetary Policy Management: The Case of Nepal," NRB Working Paper 07/2010, Nepal Rastra Bank, Research Department.

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