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Boom-Bust Phases in Asset Prices and Fiscal Policy Behavior

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  • Albert Jaeger
  • Ludger Schuknecht

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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Bibliographic 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

Related research

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

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References

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  1. Harding, Don & Pagan, Adrian, 2002. "Dissecting the cycle: a methodological investigation," Journal of Monetary Economics, Elsevier, vol. 49(2), pages 365-381, March.
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  4. Detken, Carsten & Smets, Frank, 2004. "Asset price booms and monetary policy," Working Paper Series 0364, European Central Bank.
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  6. Bordo, Michael D & Jeanne, Olivier, 2002. "Boom-Busts in Asset Prices, Economic Instability and Monetary Policy," CEPR Discussion Papers 3398, C.E.P.R. Discussion Papers.
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  9. Albert Jaeger, 2003. "Corporate Balance Sheet Restructuring and Investment in the Euro Area," IMF Working Papers 03/117, International Monetary Fund.
  10. Buti, M. & Eijffinger, S.C.W. & Franco, D., 2003. "Revisiting the stability and growth pact: Grand design or internal adjustment?," Open Access publications from Tilburg University urn:nbn:nl:ui:12-152958, Tilburg University.
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Citations

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Cited by:
  1. Tagkalakis, Athanasios, 2011. "Fiscal adjustments and asset price changes," Journal of Macroeconomics, Elsevier, vol. 33(2), pages 206-223, June.
  2. Christian Fahrholz & Cezary Wójcik, 2012. "The Bail-Out! Positive Political Economics Of Greek-Type Crises In The Emu," Journal of International Commerce, Economics and Policy (JICEP), World Scientific Publishing Co. Pte. Ltd., vol. 3(02), pages 1250010-1-1.
  3. Detken, Carsten & Smets, Frank, 2004. "Asset price booms and monetary policy," Working Paper Series 0364, European Central Bank.
  4. Adalid, Ramón & Detken, Carsten, 2007. "Liquidity shocks and asset price boom/bust cycles," Working Paper Series 0732, European Central Bank.
  5. Christian Fahrholz & Cezary Wójcik, 2012. "The Eurozone Needs Exit Rules," CESifo Working Paper Series 3845, CESifo Group Munich.
  6. Luca Agnello & Vitor Castro & Ricardo M. Sousa, 2011. "How Does Fiscal Policy React to Wealth Composition and Asset Prices?," GEMF Working Papers 2011-18, GEMF - Faculdade de Economia, Universidade de Coimbra.
  7. Karl Aiginger, 2011. "Why Growth Performance Differed across Countries in the Recent Crisis: the Impact of Pre-crisis Conditions," Review of Economics & Finance, Better Advances Press, Canada, vol. 1, pages 35-52, August.
  8. Tagkalakis, Athanasios, 2011. "Fiscal policy and financial market movements," Journal of Banking & Finance, Elsevier, vol. 35(1), pages 231-251, January.
  9. Athanasios Tagkalakis, 2009. "The effect of asset price volatility on fiscal policy outcomes," Working Papers 106, Bank of Greece.
  10. Fukuda, Shin-ichi & Yamada, Junji, 2011. "Stock price targeting and fiscal deficit in Japan: Why did the fiscal deficit increase during Japan’s lost decades?," Journal of the Japanese and International Economies, Elsevier, vol. 25(4), pages 447-464.
  11. Schuknecht, Ludger, 2004. "EU fiscal rules: issues and lessons from political economy," Working Paper Series 0421, European Central Bank.
  12. J. de Haan & H. Berger & D. Jansen, 2003. "The end of the stability and growth pact?," WO Research Memoranda (discontinued) 748, Netherlands Central Bank, Research Department.
  13. Agnello, Luca & Dufrénot, Gilles & Sousa, Ricardo M., 2013. "Using time-varying transition probabilities in Markov switching processes to adjust US fiscal policy for asset prices," Economic Modelling, Elsevier, vol. 34(C), pages 25-36.

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