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Boom-Bust Phases in Asset Prices and Fiscal Policy Behavior

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  • Ludger Schuknecht
  • Albert Jaeger

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 the fiscal stance and of the strength of underlying fiscal positions during boom-bust phases. And 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

Paper provided by International Monetary Fund in its series IMF Working Papers with number 04/54.

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Length: 36
Date of creation: 01 Apr 2004
Date of revision:
Handle: RePEc:imf:imfwpa:04/54

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Keywords: Public debt; Budget deficits; fiscal policy; fiscal balances; expenditure; fiscal balance; expenditure growth; public finances; fiscal positions; fiscal policies; fiscal institutions; fiscal position; fiscal rules; expenditure policies; fiscal stabilizers; tax cuts; public expenditure; fiscal stance; fiscal policy rules; public spending; fiscal developments; fiscal variables; fiscal policy actions; fiscal deficits; budget balances; tax increases; fiscal revenue; fiscal flexibility; expenditure ratios; fiscal measures; fiscal sustainability; fiscal outlook; fiscal stability; discretionary fiscal policies; public expenditure growth; budget consolidation; fiscal imbalances; fiscal affairs; fiscal policy responses; fiscal situation; expenditure reduction; fiscal retrenchment; budgetary discipline; discretionary fiscal policy; fiscal vulnerability; tax burden; fiscal consolidation; fiscal affairs department; structural expenditure; fiscal surplus; budget position; budget constraints; fiscal cost; fiscal behavior; fiscal revenues; tax system; public expenditure policies; aggregate demand; tax bases;

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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, Elsevier, vol. 49(2), pages 365-381, March.
  2. Michael D. Bordo & Olivier Jeanne, 2002. "Boom-Busts in Asset Prices, Economic Instability, and Monetary Policy," NBER Working Papers 8966, National Bureau of Economic Research, Inc.
  3. Claudio Borio & William English & Andrew Filardo, 2003. "A tale of two perspectives: old or new challenges for monetary policy?," BIS Papers chapters, Bank for International Settlements, in: Bank for International Settlements (ed.), Monetary policy in a changing environment, volume 19, pages 1-59 Bank for International Settlements.
  4. Marín, José M., 2002. "Sustainability of public finances and automatic stabilisation under a rule of budgetary discipline," Working Paper Series, European Central Bank 0193, European Central Bank.
  5. Bouthevillain, C. & Van Den Dool, G. & Langenus, G. & Mohr, M. & Momigliano, S. & Tujula, M. & De Cos, P.H. & Cour-Thimann, Philippine, 2001. "Cyclically Adjusted Budget Balances: an Alternative Approach," Papers 77, Quebec a Montreal - Recherche en gestion.
  6. Victor Zarnowitz, 1985. "Recent Work on Business Cycles in Historical Perspective: Review of Theories and Evidence," NBER Working Papers 1503, National Bureau of Economic Research, Inc.
  7. Bernanke, B. & Gertler, M. & Gilchrist, S., 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," Working Papers, C.V. Starr Center for Applied Economics, New York University 98-03, C.V. Starr Center for Applied Economics, New York University.
  8. 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, Tilburg University urn:nbn:nl:ui:12-152958, Tilburg University.
  9. Jordi Gali & Roberto Perotti, 2003. "Fiscal Policy and Monetary Integration in Europe," NBER Working Papers 9773, National Bureau of Economic Research, Inc.
  10. Richard Hemming & Axel Schimmelpfennig & Michael Kell, 2003. "Fiscal Vulnerability and Financial Crises in Emerging Market Economies," IMF Occasional Papers 218, International Monetary Fund.
  11. Detken, Carsten & Smets, Frank, 2004. "Asset price booms and monetary policy," Working Paper Series, European Central Bank 0364, European Central Bank.
  12. G. Russell Kincaid & Charles Collyns, 2003. "Managing Financial Crises," IMF Occasional Papers 217, International Monetary Fund.
  13. Albert Jaeger, 2003. "Corporate Balance Sheet Restructuring and Investment in the Euro Area," IMF Working Papers, International Monetary Fund 03/117, International Monetary Fund.
  14. 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.
  15. Axel Schimmelpfennig & Nouriel Roubini & Paolo Manasse, 2003. "Predicting Sovereign Debt Crises," IMF Working Papers, International Monetary Fund 03/221, International Monetary Fund.
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Citations

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Cited by:
  1. Agnello, Luca & Castro, Vítor & Sousa, Ricardo M., 2012. "How does fiscal policy react to wealth composition and asset prices?," Journal of Macroeconomics, Elsevier, Elsevier, vol. 34(3), pages 874-890.
  2. Athanasios Tagkalakis, 2010. "Fiscal policy and financial market movements," Working Papers, Bank of Greece 116, Bank of Greece.
  3. J. de Haan & H. Berger & D. Jansen, 2003. "The end of the stability and growth pact?," WO Research Memoranda (discontinued), Netherlands Central Bank, Research Department 748, Netherlands Central Bank, Research Department.
  4. Detken, Carsten & Smets, Frank, 2004. "Asset price booms and monetary policy," Working Paper Series, European Central Bank 0364, European Central Bank.
  5. 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, Elsevier, vol. 34(C), pages 25-36.
  6. 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.
  7. Adalid, Ramón & Detken, Carsten, 2007. "Liquidity shocks and asset price boom/bust cycles," Working Paper Series, European Central Bank 0732, European Central Bank.
  8. Christian Fahrholz & Cezary Wojcik, 2010. "The Bail-Out! Positive political economics of Greek-type crises in the EMU," CASE Network Studies and Analyses, CASE-Center for Social and Economic Research 413, CASE-Center for Social and Economic Research.
  9. Christian Fahrholz & Cezary Wójcik, 2012. "The Eurozone Needs Exit Rules," CESifo Working Paper Series 3845, CESifo Group Munich.
  10. 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.
  11. Athanasios Tagkalakis, 2009. "The effect of asset price volatility on fiscal policy outcomes," Working Papers, Bank of Greece 106, Bank of Greece.
  12. Schuknecht, Ludger, 2004. "EU fiscal rules: issues and lessons from political economy," Working Paper Series, European Central Bank 0421, European Central Bank.
  13. Tagkalakis, Athanasios, 2011. "Fiscal adjustments and asset price changes," Journal of Macroeconomics, Elsevier, Elsevier, vol. 33(2), pages 206-223, June.

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