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Fiscal Policy And Asset Prices

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  • Luca Agnello
  • Ricardo M. Sousa

Abstract

We assess the role played by fiscal policy in explaining the dynamics of asset markets. Using a panel of ten industrialized countries, we show that a positive fiscal shock has a negative impact in both stock and housing prices. However, while stock prices immediately adjust to the shock and the effect of fiscal policy is temporary, housing prices gradually and persistently fall. As a result, the attempts of fiscal policy to mitigate stock price developments may severely de-stabilize housing markets. The empirical findings also point to: (i) a contractionary effect of fiscal policy on output in line with the existence of crowding-out effects; (ii) a weakening of the effectiveness of fiscal policy in recent times; (iii) significant fiscal multiplier effects in the context of severe housing busts; and (iv) an increase of the sensitivity of asset prices to fiscal policy shocks following the process of financial deregulation and mortgage liberalization. Finally, the evidence suggests that changes in equity prices may help governments towards consolidation of public finances.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Bulletin of Economic Research.

Volume (Year): 65 (2013)
Issue (Month): 2 (04)
Pages: 154-177

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Handle: RePEc:bla:buecrs:v:65:y:2013:i:2:p:154-177

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  1. Aoki, Kosuke & James Proudman & Gertjan Vlieghe, 2003. "House prices, consumption, and monetary policy: a financial accelerator approach," Royal Economic Society Annual Conference 2003, Royal Economic Society 7, Royal Economic Society.
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Citations

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Cited by:
  1. Vasilios Plakandaras & Rangan Gupta & Periklis Gogas & Theophilos Papadimitriou, 2014. "Forecasting the U.S. Real House Price Index," Working Papers, Department of Research, Ipag Business School 2014-473, Department of Research, Ipag Business School.
  2. Luca Agnello & Davide Furceri & Ricardo M. Sousa, 2011. "Fiscal Policy Discretion, Private Spending, and Crisis Episodes," NIPE Working Papers, NIPE - Universidade do Minho 31/2011, NIPE - Universidade do Minho.
  3. Athanasios O. Tagkalakis, 2013. "The output effects of systematic and non-systematic fiscal policy changes in Greece," Working Papers, Bank of Greece 167, Bank of Greece.
  4. Agnello, Luca & Castro, Vítor & Sousa, Ricardo M., 2012. "How does fiscal policy react to wealth composition and asset prices?," Journal of Macroeconomics, Elsevier, Elsevier, vol. 34(3), pages 874-890.
  5. Goodness C. Aye & Rangan Gupta & Mampho P. Modise, 2012. "Do Stock Prices Impact Consumption and Interest Rate in South Africa? Evidence from a Time-Varying Vector Autoregressive Model," Working Papers 201224, University of Pretoria, Department of Economics.
  6. Luca Agnello & Gilles Dufrénot & Ricardo M. Sousa, 2012. "Adjusting the U.S. Fiscal Policy for Asset Prices: Evidence from a TVP-MS Framework," NIPE Working Papers, NIPE - Universidade do Minho 20/2012, NIPE - Universidade do Minho.
  7. Luca Agnello & Vítor Castro & Ricardo M. Sousa, 2012. "Are there change-points in the likelihood of a fiscal consolidation ending?," NIPE Working Papers, NIPE - Universidade do Minho 18/2012, NIPE - Universidade do Minho.
  8. Castroa, Vitor & Kubota, Megumi, 2013. "Duration dependence and change-points in the likelihood of credit booms ending," Policy Research Working Paper Series 6475, The World Bank.

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