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Structural balances and revenue windfalls - the role of asset prices revisited

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Author Info
Richard Morris () (Corresponding author: European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main; Germany.)
Ludger Schuknecht () (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)

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Abstract

In this paper we revisit one of the “missing links” between budget balances and the economic cycle, namely the impact of asset prices on fiscal revenues. We estimate revenue elasticities with respect to equity and real estate price indices for 16 OECD countries, as well as for a synthetic euro area aggregate. For a sub-sample of euro area countries, we use these elasticities to investigate the impact of asset prices on budget balances and the assessment of the fiscal stance by adjusting existing estimates of cyclically adjusted balances for the asset price “cycle”. The results support the view that asset price movements are a major factor behind unexplained changes in the cyclically adjusted balance, which, if not accounted for, can lead to erroneous conclusions regarding underlying fiscal developments. JEL Classification: H2, H6, E6, G1.

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Paper provided by European Central Bank in its series Working Paper Series with number 737.

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Length: 45 pages
Date of creation: Mar 2007
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Handle: RePEc:ecb:ecbwps:20070737

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Keywords: Fiscal policies; deficits; asset prices; tax revenues.;

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  1. Olli Castrén & Chiara Osbat & Matthias Sydow, 2006. "What drives investors’ behaviour in different FX market segments? A VAR-based return decomposition analysis," Working Paper Series 706, European Central Bank. [Downloadable!]
  2. Paul Levine & Peter McAdam & Joseph Pearlman, 2007. "Quantifying and sustaining welfare gains from monetary commitment," Working Paper Series 709, European Central Bank. [Downloadable!]
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  3. Gabriel Fagan & Vítor Gaspar, 2007. "Adjusting to the euro," Working Paper Series 716, European Central Bank. [Downloadable!]
  4. Philip Vermeulen & Daniel Dias & Maarten Dossche & Erwan Gautier & Ignacio Hernando & Roberto Sabbatini & Harald Stahl, 2007. "Price setting in the euro area : some stylised facts from individual producer price data," Research series 200703-30, National Bank of Belgium. [Downloadable!]
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  5. Emmanuel Dhyne & Luis J. Álvarez & Hervé Le Bihan & Giovanni Veronese & Daniel Dias & Johannes Hoffmann & Nicole Jonker & Patrick Lünnemann & Fabio Rumler & Jouko Vilmunen, 2005. "Price setting in the euro area: some stylized facts from individual consumer price data," Working Paper Series 524, European Central Bank. [Downloadable!]
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  6. Marco Cipriani & Antonio Guarino, 2006. "Transaction Costs and Informational Cascades in Financial Markets: Theory and Experimental Evidence," WEF Working Papers 0008, ESRC World Economy and Finance Research Programme, Birkbeck, University of London. [Downloadable!]
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  7. Reint Gropp & Christoffer Kok Sørensen & Jung-Duk Lichtenberger, 2007. "The dynamics of bank spreads and financial structure," Working Paper Series 714, European Central Bank. [Downloadable!]
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  1. Teresa Leal & Javier J. Pérez & Mika Tujula & Jean-Pierre Vidal, 2007. "Fiscal forecasting - lessons from the literature and challenges," Working Paper Series 843, European Central Bank. [Downloadable!]
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  2. Anthony Annett, 2007. "Toward a Robust Fiscal Framework for Iceland: Motivation and Practical Suggestions," IMF Working Papers 07/235, International Monetary Fund. [Downloadable!]
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