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Fiscal Policy Shocks and the Dynamics of Asset Prices: The South African Experience

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Author Info

  • Goodness C. Aye

    (University of Pretoria)

  • Mehmet Balcilar

    (Eastern Mediterranean University)

  • Rangan Gupta

    (University of Pretoria)

  • Charl Jooste

    (University of Pretoria)

  • Stephen M. Miller

    (University of Nevada, Las Vegas and University of Connecticut)

  • Zeynel Abidin Ozdemir

    (Gazi University)

Abstract

This study assesses how fiscal policy affects the dynamics of asset markets, using Bayesian vector autoregressive models. We use sign restrictions to identify government revenue and government spending shocks, while controlling for generic business cycle and monetary policy shocks. In addition to examining the effects of anticipated and unanticipated revenue and spending shocks, we also analyse three types of fiscal policy scenarios: a deficit-financed spending increase, a balanced budget spending increase (financed with higher taxes), and a deficit-financed tax cut (revenue decreases but government spending stays unchanged). Using South African quarterly data from 1966:Q1 to 2011:Q2, we show that a deficit spending shock does not affect house prices, but temporarily exerts a positive effect on stock prices. With a deficit-financed tax cut shock, house prices increase persistently while stock prices increase quickly, but only temporarily. A balanced budget shock permanently decreases house prices and temporarily reduces stock prices. JEL Classification: C32, E62, G10, H62 Key words: Bayesian Sign-Restricted VAR, fiscal policy, housing prices, stock prices

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Bibliographic Info

Paper provided by University of Connecticut, Department of Economics in its series Working papers with number 2012-27.

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Length: 34 pages
Date of creation: Sep 2012
Date of revision:
Publication status: Forthcoming in Public Finance Review
Handle: RePEc:uct:uconnp:2012-27

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Cited by:
  1. Rangan Gupta & Charl Jooste & Kanyane Matlou, 2013. "A Time-Varying Approach to Analysing Fiscal Policy and Asset Prices in South Africa," Working Papers 201303, University of Pretoria, Department of Economics.
  2. Alexander Zimper, 2014. "The minimal confidence levels of Basel capital regulation," Journal of Banking Regulation, Palgrave Macmillan, vol. 15(2), pages 129-143, April.
  3. Xiao-lin Li & Mehmet Balcilar & Rangan Gupta & Tsangyao Chang, 2013. "The Causal Relationship between Economic Policy Uncertainty and Stock Returns in China and India: Evidence from a Bootstrap Rolling-Window Approach," Working Papers 201345, University of Pretoria, Department of Economics.

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