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Budgetary risks from real estate and stock markets

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  • Felix Eschenbach
  • Ludger Schuknecht

Abstract

"Fiscal revenues and government expenditures are affected by asset price changes in ways that are not accounted for by standard cyclical-adjustment methods. Revenues are influenced by capital gains and turnover taxation, as well as by output changes determined by the effect of wealth changes on consumption and investment. And outlays may also be affected if collapsing asset prices prompt fiscal authorities to bail out private-sector balance sheet problems. We point out that these effects can be asymmetric, resulting in deficit and debt biases, and we find support for this phenomenon in panel estimates for a sample of 20 industrialized countries over 1982-2002. The estimated coefficients indicate that 30-40% of the dramatic early 1990s fiscal balance deteriorations in the UK and Sweden was due to asset price effects, with a particularly relevant role for real estate price changes. If financial markets experience boom-bust cycles, prudent management of fiscal windfalls in boom phases is needed to ensure fiscal and financial sustainability in bust phases, and budgetary rules may need to account explicitly for a separate role of asset price-related effects." Copyright � Blackwell Publishing 2004.

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Bibliographic Info

Article provided by CEPR & CES & MSH in its journal Economic Policy.

Volume (Year): 19 (2004)
Issue (Month): 39 (07)
Pages: 313-346

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Handle: RePEc:bla:ecpoli:v:19:y:2004:i:39:p:313-346

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Cited by:
  1. Philip Lane, 2010. "International Differences in Fiscal Policy During the Global Crisis," The Institute for International Integration Studies Discussion Paper Series iiisdp336, IIIS.
  2. António Afonso & Peter Claeys, 2006. "The dynamic behaviour of budget components and output – the cases of France, Germany, Portugal, and Spain," Working Papers Department of Economics 2006/26, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  3. Martin, Reiner & Schuknecht, Ludger & Vansteenkiste, Isabel, 2007. "The role of the exchange rate for adjustment in boom and bust episodes," Working Paper Series 0813, European Central Bank.
  4. Niels Gilbert & Jeroen Hessel & Silvie Verkaart, 2013. "Towards a Stable Monetary Union: What Role for Eurobonds?," DNB Working Papers 379, Netherlands Central Bank, Research Department.
  5. Leal, Teresa & Pérez, Javier J. & Tujula, Mika & Vidal, Jean-Pierre, 2007. "Fiscal forecasting: lessons from the literature and challenges," Working Paper Series 0843, European Central Bank.
  6. Bénétrix, Agustín S. & Lane, Philip R., 2013. "Fiscal cyclicality and EMU," Journal of International Money and Finance, Elsevier, vol. 34(C), pages 164-176.
  7. Philip Lane, 2010. "External Imbalances and Fiscal Policy," The Institute for International Integration Studies Discussion Paper Series iiisdp314, IIIS.
  8. Philip Lane, 2010. "Some Lessons for Fiscal Policy from the Financial Crisis," The Institute for International Integration Studies Discussion Paper Series iiisdp334, IIIS.
  9. Martin Larch & Jo�o Nogueira Martins, 2007. "Fiscal indicators - Proceedings of the the Directorate-General for Economic and Financial Affairs Workshop held on 22 September 2006 in Brussels," European Economy - Economic Papers 297, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  10. Mika Tujula & Guido Wolswijk, 2007. "Budget balances in OECD countries: what makes them change?," Empirica, Springer, vol. 34(1), pages 1-14, March.
  11. Schuknecht, Ludger, 2004. "EU fiscal rules: issues and lessons from political economy," Working Paper Series 0421, European Central Bank.

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