Fiscal developments and financial stress: a threshold VAR analysis
AbstractWe use a threshold VAR analysis to study whether the effects of fiscal policy on economic activity differ depending on financial market conditions. In particular, we investigate the possibility of a non-linear propagation of fiscal developments according to different financial market stress regimes. More specifically we employ a quarterly dataset, for the U.S., the U.K., Germany and Italy, for the period 1980:4-2009:4, encompassing macro, fiscal and financial variables. The results show that (i) the use of a nonlinear framework with regime switches is corroborated by nonlinearity tests; (ii) the responses of economic growth to a fiscal shock are mostly positive in both financial stress regimes; (iii) financial stress has a negative effect on output growth and worsens the fiscal position; (iv) the nonlinearity in the response of output growth to a fiscal shock is mainly associated with different behaviour across regimes; (v) the size of the fiscal multipliers is higher than average in the last crisis.
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Bibliographic InfoPaper provided by Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies in its series Working Papers IES with number 2011/16.
Date of creation: Aug 2011
Date of revision: Aug 2011
fiscal policy; financial markets; threshold VAR;
Other versions of this item:
- Afonso, António & Baxa, Jaromír & Slavík, Michal, 2011. "Fiscal developments and financial stress: a threshold VAR analysis," Working Paper Series 1319, European Central Bank.
- António Afonso & Jaromír Baxa & Michal Slavík, 2011. "Fiscal developments and financial stress: a threshold VAR analysis," Working Papers 2011/11, Department of Economics at the School of Economics and Management (ISEG), Technical University of Lisbon..
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
- H60 - Public Economics - - National Budget, Deficit, and Debt - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-06-25 (All new papers)
- NEP-EEC-2011-06-25 (European Economics)
- NEP-FDG-2011-06-25 (Financial Development & Growth)
- NEP-MAC-2011-06-25 (Macroeconomics)
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