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Asset price volatility and government revenue

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  • Athanasios Tagkalakis

    ()
    (Bank of Greece)

Abstract

This paper investigates the effect of commercial, residential property and equity price volatility on the variability of cyclically adjusted government revenue. We find significant evidence that asset price volatility increases the variability of government revenue. A 1 percent increase in equity price volatility increases government revenue variability by 0.37-0.44 percent. An increase in residential property price volatility increases revenue volatility by about 0.15-0.22 percent, whereas this effect diminishes to 0.11 percent in case of commercial property price. This evidence reflects the automatic increase of government revenue variability due to asset price movements and supports arguments in favour of adjusting fiscal variables for both business cycle and asset price changes. However, we also find evidence that equity price variability increases revenue variability even when government revenue is adjusted for both economic and asset price cycles, indicating the presence of more complicated dynamics between fiscal variables and asset price changes.

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Bibliographic Info

Paper provided by Bank of Greece in its series Working Papers with number 133.

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Length: 40
Date of creation: Jun 2011
Date of revision:
Handle: RePEc:bog:wpaper:133

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Keywords: Asset prices; government revenue; volatility; cyclical adjustment.;

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References

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  1. Anton Muscatelli & Patrizio Tirelli & Carmine Trecroci, 2003. "Fiscal and Monetary Policy Interactions: Empirical Evidence and Optimal Policy Using a Structural New Keynesian Model," CESifo Working Paper Series 1060, CESifo Group Munich.
  2. Troy Davig & Eric M. Leeper, 2009. "Monetary-fiscal policy interactions and fiscal stimulus," Research Working Paper, Federal Reserve Bank of Kansas City RWP 09-12, Federal Reserve Bank of Kansas City.
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  6. Carmen M. Reinhart & Kenneth S. Rogoff, 2008. "Banking Crises: An Equal Opportunity Menace," NBER Working Papers 14587, National Bureau of Economic Research, Inc.
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  8. Dani Rodrik, 1998. "Why Do More Open Economies Have Bigger Governments?," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 106(5), pages 997-1032, October.
  9. Candelon, Bertrand & Muysken, Joan & Vermeulen, Robert, 2007. "Fiscal Policy and Monetary Integration in Europe: An Update," Research Memorandum 050, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  10. Athanasios Tagkalakis, 2010. "Fiscal policy and financial market movements," Working Papers, Bank of Greece 116, Bank of Greece.
  11. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "The Aftermath of Financial Crises," NBER Working Papers 14656, National Bureau of Economic Research, Inc.
  12. Mika Tujula & Guido Wolswijk, 2007. "Budget balances in OECD countries: what makes them change?," Empirica, Springer, Springer, vol. 34(1), pages 1-14, March.
  13. Oya Celasun & Xavier Debrun & Jonathan David Ostry, 2006. "Primary Surplus Behavior and Risks to Fiscal Sustainability in Emerging Market Countries," IMF Working Papers 06/67, International Monetary Fund.
  14. David Roodman, 2006. "How to Do xtabond2: An Introduction to "Difference" and "System" GMM in Stata," Working Papers, Center for Global Development 103, Center for Global Development.
  15. Honohan, Patrick & Klingebiel, Daniela, 2003. "The fiscal cost implications of an accommodating approach to banking crises," Journal of Banking & Finance, Elsevier, Elsevier, vol. 27(8), pages 1539-1560, August.
  16. Antonio Fatás & Ilian Mihov, 2003. "The Case For Restricting Fiscal Policy Discretion," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 118(4), pages 1419-1447, November.
  17. Tagkalakis, Athanasios, 2011. "Fiscal adjustments and asset price changes," Journal of Macroeconomics, Elsevier, Elsevier, vol. 33(2), pages 206-223, June.
  18. Gali, Jordi, 1994. "Government size and macroeconomic stability," European Economic Review, Elsevier, Elsevier, vol. 38(1), pages 117-132, January.
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  20. repec:fth:eeccco:148 is not listed on IDEAS
  21. Arin, K. Peren & Mamun, Abdullah & Purushothman, Nanda, 2009. "The effects of tax policy on financial markets: G3 evidence," Review of Financial Economics, Elsevier, Elsevier, vol. 18(1), pages 33-46, January.
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Cited by:
  1. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "The Aftermath of Financial Crises," NBER Working Papers 14656, National Bureau of Economic Research, Inc.

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