Macroeconomic Policy Coordination and British Labour Market : Is the State Contingent Forward Guidance Dancing a Tango Solo?

This study has added a new perspective to the implications of macroeconomic policy coordination for the labour market in the UK. Using quarterly macroeconomic indicators (GDP, fiscal, monetary and unemployment) from 1978 to 2007 (30 years, 120 observations) and VEC model, this study intends to examine how fiscal and monetary policy interaction has an impact on labour market in long-term. The results showed that an expansionary fiscal and accommodating monetary stance can be effective to curb unemployment and the economic growth has a positive association with the outlook of labour market. In addition, the expansionary fiscal policy led monetary policy to adopt a contractionary stance and correspondingly the adoption of the contractionary stance by monetary policy compelled fiscal policy towards expansion. The evidence from this study suggests that a policy conflict can lead to adverse impact on the labour market and therefore State Contingent Forward Guidance provided by the Bank of England would require fiscal policy support