Moderating roles of central bank independence and financial freedom in the relationship between government intervention and financial stability

Maintaining stability while pursuing financial growth has become a global challenge. Government intervention to remedy market failures is essential, but the selection of practical and appropriate interventions for different groups requires discussion. Thus, this study mainly examines the impact of government intervention on multi-dimensional financial stability. The moderating effects of central bank independence (the macro-operational level through the relationship between the central bank and the government) and financial freedom (the micro-business environment level represents institution efficiency) on the effectiveness of government intervention in multi-dimensional financial stability are discussed. To find more effective and appropriate interventions, government intervention is compared from two aspects: fiscal policy (represented by government spending) and monetary policy (represented by monetary freedom). Financial stability is measured from household savings, the credit growth rate, and the deviation of the GDP growth rate (from micro to macro dimensions). Mainly four theories including the loanable funds theory, the government intervention theory, the game theory and the liberalization theory are used to support all hypotheses. The data for this study is selected from 136 countries all over the world, and the GMM model is used to verify the empirical results for 7 years from 2016 to 2022. The results of objective 1 indicate that minimal fiscal intervention leads to more excellent stability in household savings, but it results in instability in the credit market and GDP environment. Less intervention in the monetary sector contributes to stability in all three dimensions of financial stability. Monetary policy has a more significant impact and is more effective than fiscal policy as it directly addresses the supply side rather than the demand side. The results for objective 2 show that marginal effects make it easier to understand the significant moderating effect of central bank independence. Greater central bank independence has a more pronounced impact on fiscal intervention (government spending) because the central bank's operational goals are closely aligned with monetary intervention. The findings from objective 3 indicate that financial freedom also plays a significant role in moderating the influence of government intervention on multi-dimensional financial stability. Specifically, greater financial freedom has a more pronounced impact on monetary intervention (monetary freedom). However, when both financial freedom and monetary freedom are high, this can result in heightened risk within the credit market. In summary, this study conducts a multi-dimensional analysis of financial stability, which enriches the overall stable state of financial stability. Find the corresponding target groups for different government interventions to maximize the effect. Central bank independence and financial freedom significantly moderate the effectiveness of government intervention on financial stability and help policymakers find more direct and appropriate interventions to maintain financial stability according to the actual situation.

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