IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this article

Using time-varying transition probabilities in Markov switching processes to adjust US fiscal policy for asset prices

Listed author(s):
  • Agnello, Luca
  • Dufrénot, Gilles
  • Sousa, Ricardo M.

This paper tests for nonlinear effects of asset prices on the US fiscal policy. By modeling government spending and taxes as time-varying transition probability Markovian processes (TVPMS), we find that taxes significantly adjust in a nonlinear fashion to asset prices. In particular, taxes respond to housing and (to a smaller extent) to stock price changes during normal times. However, at periods characterized by high financial volatility, government taxation only counteracts stock market developments (and not the dynamics of the housing sector). As for government spending, it is neutral vis-a-vis the asset market cycles. We conclude that, correcting the fiscal balance and, notably, the revenue side for time-varying effects of asset prices provides a more accurate assessment of the fiscal stance and its sustainability.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.sciencedirect.com/science/article/pii/S0264999312004117
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 34 (2013)
Issue (Month): C ()
Pages: 25-36

as
in new window

Handle: RePEc:eee:ecmode:v:34:y:2013:i:c:p:25-36
DOI: 10.1016/j.econmod.2012.11.054
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30411

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as
in new window


  1. Sousa, Ricardo M., 2010. "Housing wealth, financial wealth, money demand and policy rule: Evidence from the euro area," The North American Journal of Economics and Finance, Elsevier, vol. 21(1), pages 88-105, March.
  2. Castro, Vítor, 2010. "The duration of economic expansions and recessions: More than duration dependence," Journal of Macroeconomics, Elsevier, vol. 32(1), pages 347-365, March.
  3. Agnello, Luca & Castro, Vítor & Sousa, Ricardo M., 2012. "How does fiscal policy react to wealth composition and asset prices?," Journal of Macroeconomics, Elsevier, vol. 34(3), pages 874-890.
  4. Dufrénot, Gilles & Malik, Sheheryar, 2012. "The changing role of house price dynamics over the business cycle," Economic Modelling, Elsevier, vol. 29(5), pages 1960-1967.
  5. Blake, A. & Vines, D. & Weale, M., 1988. "Wealth Targets, Exchange Rate Targets And Macroeconomic Policy," Cambridge Working Papers in Economics 887, Faculty of Economics, University of Cambridge.
  6. Luca Agnello & Jacopo Cimadomo, 2012. "Discretionary Fiscal Policies over the Cycle: New Evidence Based on the ESCB Disaggregated Approach," International Journal of Central Banking, International Journal of Central Banking, vol. 8(2), pages 43-85, June.
  7. Agnello, Luca & Nerlich, Carolin, 2012. "On the severity of economic downturns: Lessons from cross-country evidence," Economics Letters, Elsevier, vol. 117(1), pages 149-155.
  8. António Afonso & Luca Agnello & Davide Furceri, 2008. "Fiscal Policy Responiveness, Persistence and Discretion," Working Papers Department of Economics 2008/50, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  9. Canova, Fabio, 1998. "Detrending and business cycle facts: A user's guide," Journal of Monetary Economics, Elsevier, vol. 41(3), pages 533-540, May.
  10. Carine Bouthevillain & Gilles Dufrénot, 2011. "Are the effects of fiscal changes different in times of crisis and non crisis? The French case," Revue d'économie politique, Dalloz, vol. 121(3), pages 371-407.
  11. Canova, Fabio, 1993. "Detrending and Business Cycle Facts," CEPR Discussion Papers 782, C.E.P.R. Discussion Papers.
  12. Kiefer, Nicholas M, 1978. "Discrete Parameter Variation: Efficient Estimation of a Switching Regression Model," Econometrica, Econometric Society, vol. 46(2), pages 427-434, March.
  13. Vítor Castro & Ricardo M. Sousa, 2010. "How Do Central Banks React to Wealth Composition and Asset Prices?," NIPE Working Papers 26/2010, NIPE - Universidade do Minho.
  14. 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.
  15. Jeanne, Olivier & Masson, Paul, 2000. "Currency crises, sunspots and Markov-switching regimes," Journal of International Economics, Elsevier, vol. 50(2), pages 327-350, April.
  16. Agnello, Luca & Schuknecht, Ludger, 2009. "Booms and busts in housing markets: determinants and implications," Working Paper Series 1071, European Central Bank.
  17. Carine Bouthevillain & Gilles Dufrénot & Pierre Jaillet, 2011. "New Challenges for Public Debt in Advanced Economies," Revue économique, Presses de Sciences-Po, vol. 62(6), pages 971-974.
  18. 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.
  19. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-384, March.
  20. Filardo, Andrew J, 1994. "Business-Cycle Phases and Their Transitional Dynamics," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(3), pages 299-308, July.
  21. repec:taf:applec:44:y:2012:i:34:p:4439-4454 is not listed on IDEAS
  22. Athanasios Tagkalakis, 2010. "Fiscal policy and financial market movements," Working Papers 116, Bank of Greece.
  23. Andrew J. Filardo & Stephen F. Gordon, 1993. "Business cycle durations," Research Working Paper 93-11, Federal Reserve Bank of Kansas City.
  24. Kim, Chang-Jin & Piger, Jeremy & Startz, Richard, 2008. "Estimation of Markov regime-switching regression models with endogenous switching," Journal of Econometrics, Elsevier, vol. 143(2), pages 263-273, April.
  25. Goldfeld, Stephen M. & Quandt, Richard E., 1973. "A Markov model for switching regressions," Journal of Econometrics, Elsevier, vol. 1(1), pages 3-15, March.
  26. Hamilton, James D., 1988. "Rational-expectations econometric analysis of changes in regime : An investigation of the term structure of interest rates," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 385-423.
  27. Afonso, António & Sousa, Ricardo M., 2011. "What are the effects of fiscal policy on asset markets?," Economic Modelling, Elsevier, vol. 28(4), pages 1871-1890, July.
  28. Luca Agnello & Ricardo M. Sousa, 2011. "Can Fiscal Policy Stimulus Boost Economic Recovery?," Revue économique, Presses de Sciences-Po, vol. 62(6), pages 1045-1066.
  29. Daniel S Kanda, 2010. "Asset Booms and Structural Fiscal Positions; The Case of Ireland," IMF Working Papers 10/57, International Monetary Fund.
  30. Lossani, M & Tirelli, P, 1994. "Simple Rules, Fiscal Policy and Wealth Targets in a Monetary Union. An Alternative to the Maastricht Guidelines," Scottish Journal of Political Economy, Scottish Economic Society, vol. 41(4), pages 372-393, November.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:eee:ecmode:v:34:y:2013:i:c:p:25-36. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.