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Boom-Bust Phases in Asset Prices and Fiscal Policy Behavior

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Author Info
Albert Jaeger
Ludger Schuknecht

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Abstract

Boom and bust phases in asset prices have become a pervasive feature of macroeconomic developments in many advanced economies. This paper studies fiscal policy during boom-bust phases in asset prices and draws several conclusions. First, expansions and contractions in economic activity during such boom-bust phases tend to be highly persistent, cyclical turning points are harder to forecast, and the margins of error for output gap estimates can be large. Second, conventional estimates of revenue elasticities seem not to allow an accurate assessment of fiscal stance or the strength of underlying fiscal positions during boom-bust phases. Third, boom-bust phases tend to exacerbate already existing procyclical policy biases, as well as political-economy biases, toward higher spending and public-debt ratios.

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Publisher Info
Article provided by M.E. Sharpe, Inc. in its journal Emerging Markets Finance and Trade.

Volume (Year): 43 (2007)
Issue (Month): 6 (November)
Pages: 45-66
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Handle: RePEc:mes:emfitr:v:43:y:2007:i:6:p:45-66

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Web page: http://mesharpe.metapress.com/link.asp?target=journal&id=111024

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Related research
Keywords: asset prices; boom-bust cycles; cyclical adjustment; deficit bias; fiscal policy;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Albert Jaeger, 2003. "Corporate Balance Sheet Restructuring and Investment in the Euro Area," IMF Working Papers 03/117, International Monetary Fund. [Downloadable!]
  2. Jordi GalÌ & Roberto Perotti, 2003. "Fiscal policy and monetary integration in Europe," Economic Policy, CEPR, CES, MSH, vol. 18(37), pages 533-572, October. [Downloadable!] (restricted)
    Other versions:
  3. Honohan, Patrick & Klingebiel, Daniela, 2003. "The fiscal cost implications of an accommodating approach to banking crises," Journal of Banking & Finance, Elsevier, vol. 27(8), pages 1539-1560, August. [Downloadable!] (restricted)
  4. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393 Elsevier. [Downloadable!] (restricted)
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  5. Jose Marin, 2002. "Sustainability of public finances and automatic stabilisation under a rule of budgetary discipline," Working Paper Series 193, European Central Bank. [Downloadable!]
  6. Buti, Marco & Eijffinger, Sylvester C W & Franco, Daniele, 2003. "Revisiting the Stability and Growth Pact: Grand Design or Internal Adjustment?," CEPR Discussion Papers 3692, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  7. Richard Hemming & Michael Kell & Axel Schimmelpfennig, 2003. "Fiscal Vulnerability and Financial Crises in Emerging Market Economies," IMF Occasional Papers 218, International Monetary Fund.
  8. Charles Collyns & G. Russell Kincaid, 2003. "Managing Financial Crises: Recent Experience and Lessons for Latin America," IMF Occasional Papers 217, International Monetary Fund.
  9. Harding, Don & Pagan, Adrian, 2002. "Dissecting the cycle: a methodological investigation," Journal of Monetary Economics, Elsevier, vol. 49(2), pages 365-381, March. [Downloadable!] (restricted)
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  10. Paolo Manasse & Axel Schimmelpfennig & Nouriel Roubini, 2003. "Predicting Sovereign Debt Crises," IMF Working Papers 03/221, International Monetary Fund. [Downloadable!]
  11. Claudio E. V. Borio & Wiliam English & Andrew Filardo, 2003. "A tale of two perspectives: old or new challenges for monetary policy?," BIS Working Papers 127, Bank for International Settlements. [Downloadable!]
  12. Philippine Cour-Thimann & Pablo Hernandez Cos & Matthias F. Mohr & Mika Tujula & Carine Bouthevillain & Geert Langenus & Sandro Momigliano & Gerrit Van Den Dool, 2001. "Cyclically adjusted budget balances: an alternative approach," Working Paper Series 077, European Central Bank. [Downloadable!]
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  13. Carsten Detken & Frank Smets, 2004. "Asset price booms and monetary policy," Working Paper Series 364, European Central Bank. [Downloadable!]
  14. Claudio Borio & William English & Andrew Filardo, 2003. "A tale of two perspectives: old or new challenges for monetary policy?," BIS Papers chapters, in: Bank for International Settlements (ed.), Monetary policy in a changing environment, volume 19, pages 1-59 Bank for International Settlements. [Downloadable!]
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Ludger Schuknecht, 2004. "EU fiscal rules: issues and lessons from political economy," Working Paper Series 421, European Central Bank. [Downloadable!]
  2. Jakob de Haan & Helge Berger & David-Jan Jansen, 2003. "The End of the Stability and Growth Pact?," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  3. Ramón Adalid & Carsten Detken, 2007. "Liquidity shocks and asset price boom/bust cycles," Working Paper Series 732, European Central Bank. [Downloadable!]
  4. Carsten Detken & Frank Smets, 2004. "Asset price booms and monetary policy," Working Paper Series 364, European Central Bank. [Downloadable!]
  5. Lars Jonung & Ludger Schuknecht & Mika Tujula, 2006. "The Boom-Bust Cycle in Finland and Sweden 1984-1995 in an International Perspective," CFS Working Paper Series 2006/13, Center for Financial Studies. [Downloadable!]
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