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Budgetary risks from real estate and stock markets

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  • Felix Eschenbach
  • Ludger Schuknecht

Abstract

type="main" xml:lang="en"> Fiscal revenues and government expenditures are affected by asset price changes in ways that are not accounted for by standard cyclical-adjustment methods. Revenues are influenced by capital gains and turnover taxation, as well as by output changes determined by the effect of wealth changes on consumption and investment. And outlays may also be affected if collapsing asset prices prompt fiscal authorities to bail out private-sector balance sheet problems. We point out that these effects can be asymmetric, resulting in deficit and debt biases, and we find support for this phenomenon in panel estimates for a sample of 20 industrialized countries over 1982–2002. The estimated coefficients indicate that 30–40% of the dramatic early 1990s fiscal balance deteriorations in the UK and Sweden was due to asset price effects, with a particularly relevant role for real estate price changes. If financial markets experience boom–bust cycles, prudent management of fiscal windfalls in boom phases is needed to ensure fiscal and financial sustainability in bust phases, and budgetary rules may need to account explicitly for a separate role of asset price-related effects. — Felix Eschenbach and Ludger Schuknecht

Suggested Citation

  • Felix Eschenbach & Ludger Schuknecht, 2004. "Budgetary risks from real estate and stock markets," Economic Policy, CEPR;CES;MSH, vol. 19(39), pages 313-346, July.
  • Handle: RePEc:bla:ecpoli:v:19:y:2004:i:39:p:313-346
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    File URL: http://hdl.handle.net/10.1111/j.1468-0327.2004.00125.x
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    Cited by:

    1. Bénétrix, Agustín & Lane, Philip R., 2010. "International Differences in Fiscal Policy During the Global Crisis," CEPR Discussion Papers 8009, C.E.P.R. Discussion Papers.
    2. Achim Truger, 2015. "The Fiscal Compact, Cyclical Adjustment and the Remaining Leeway for Expansionary Fiscal Policies in the Euro Area," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 62(2), pages 157-175, June.
    3. Teresa Leal & Javier J. Pérez & Mika Tujula & Jean-Pierre Vidal, 2008. "Fiscal Forecasting: Lessons from the Literature and Challenges," Fiscal Studies, Institute for Fiscal Studies, vol. 29(3), pages 347-386, September.
    4. António Afonso & Peter Claeys, 2006. "The dynamic behaviour of budget components and output – the cases of France, Germany, Portugal, and Spain," Working Papers Department of Economics 2006/26, ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa.
    5. Claudio Borio, 2014. "The financial cycle and macroeconomics: what have we learned and what are the policy implications?," Chapters,in: Financial Cycles and the Real Economy, chapter 2, pages 10-35 Edward Elgar Publishing.
    6. Achim TRUGER & Michael NAGEL, 2016. "Austerity, Cyclical Adjustment and How to use the Remaining Leeway for Expansionary Fiscal Policies Within the Current EU Fiscal Framework," Turkish Economic Review, KSP Journals, vol. 3(2), pages 235-255, June.
    7. Schuknecht, Ludger, 2004. "EU fiscal rules: issues and lessons from political economy," Working Paper Series 421, European Central Bank.
    8. Borio, Claudio, 2014. "The financial cycle and macroeconomics: What have we learnt?," Journal of Banking & Finance, Elsevier, vol. 45(C), pages 182-198.
    9. Claudio Borio, 2011. "Rediscovering the Macroeconomic Roots of Financial Stability Policy: Journey, Challenges, and a Way Forward," Annual Review of Financial Economics, Annual Reviews, vol. 3(1), pages 87-117, December.
    10. Bénétrix, Agustín S. & Lane, Philip R., 2013. "Fiscal cyclicality and EMU," Journal of International Money and Finance, Elsevier, vol. 34(C), pages 164-176.
    11. Claudio Borio & Marco Jacopo Lombardi & Fabrizio Zampolli, 2016. "Fiscal sustainability and the financial cycle," BIS Working Papers 552, Bank for International Settlements.
    12. Niels Gilbert & Jeroen Hessel & Silvie Verkaart, 2013. "Towards a Stable Monetary Union: What Role for Eurobonds?," DNB Working Papers 379, Netherlands Central Bank, Research Department.
    13. Albert Jaeger & Ludger Schuknecht, 2007. "Boom-Bust Phases in Asset Prices and Fiscal Policy Behavior," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 43(6), pages 45-66, November.
    14. Gunther Schnabl, 2016. "Central Banking and Crisis Management from the Perspective of Austrian Business Cycle Theory," CESifo Working Paper Series 6179, CESifo Group Munich.
    15. Luisa Corrado & Tobias Schuler, 2018. "Financial Bubbles in Interbank Lending," ifo Working Paper Series 260, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    16. Jakob de Haan & Jeroen Hessel & Niels Gilbert, 2014. "Reforming the architecture of EMU: Ensuring stability in Europe," DNB Working Papers 446, Netherlands Central Bank, Research Department.
    17. Mika Tujula & Guido Wolswijk, 2007. "Budget balances in OECD countries: what makes them change?," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 34(1), pages 1-14, March.
    18. Philip Lane, 2010. "Some Lessons for Fiscal Policy from the Financial Crisis," The Institute for International Integration Studies Discussion Paper Series iiisdp334, IIIS.
    19. Albert Jaeger & Ludger Schuknecht, 2007. "Boom-Bust Phases in Asset Prices and Fiscal Policy Behavior," Emerging Markets Finance and Trade, M.E. Sharpe, Inc., vol. 43(6), pages 45-66, November.
    20. Truger, Achim, 2015. "Austerity, cyclical adjustment and the remaining leeway for expansionary fiscal policies within the current EU fiscal framework," IPE Working Papers 50/2015, Berlin School of Economics and Law, Institute for International Political Economy (IPE).
    21. Martin Larch & João Nogueira Martins, 2007. "Fiscal indicators - Proceedings of the the Directorate-General for Economic and Financial Affairs Workshop held on 22 September 2006 in Brussels," European Economy - Economic Papers 2008 - 2015 297, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    22. Philip Lane, 2010. "External Imbalances and Fiscal Policy," The Institute for International Integration Studies Discussion Paper Series iiisdp314, IIIS.
    23. Sebastian Gechert & Rafael Mentges, 2017. "Financial Cycles and fiscal multipliers," FMM Working Paper 04-2017, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    24. Schuknecht, Ludger & Martin, Reiner & Vansteenkiste, Isabel, 2007. "The role of the exchange rate for adjustment in boom and bust episodes," Working Paper Series 813, European Central Bank.

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