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Nonlinear effects of asset prices on fiscal policy: Evidence from the UK, Italy and Spain

Author

Listed:
  • Luca Agnello
  • Gilles Dufrénot

    (Centre de recherche de la Banque de France - Banque de France, CEPII - Centre d'Etudes Prospectives et d'Informations Internationales - Centre d'analyse stratégique, GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique)

  • Ricardo M. Sousa

Abstract

We test for nonlinear effects of asset prices on the fiscal policy of three major European economies (the UK, Italy and Spain). We model primary government spending and government revenue as time-varying transition probability Markovian processes (TVPMS). We find that while in Italy fiscal policy is substantially neutral vis-à-vis asset price movements, fiscal authorities in the UK and Spain seem to track the dynamics of wealth. In particular, revenue-based fiscal policy interventions in the UK are particularly effective in counteracting shocks in the asset markets induced by sharp wealth fluctuations. Similarly, in Spain, the spending-side of the fiscal policy plays a dominant role in stabilizing stock and housing markets.

Suggested Citation

  • Luca Agnello & Gilles Dufrénot & Ricardo M. Sousa, 2015. "Nonlinear effects of asset prices on fiscal policy: Evidence from the UK, Italy and Spain," Post-Print hal-01457314, HAL.
    • Handle: RePEc:hal:journl:hal-01457314
    DOI: 10.1016/j.econmod.2014.07.024
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    Cited by:

    1. Gabriela-Victoria Anghelache & Stela Jakova & Dumitru-Cristian Oanea, 2016. "Fiscal Policy and Capital Market Performance: Evidence from EU Countries from Central and Eastern Europe," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 6(2), pages 34-43, April.
    2. Rudan Wang & Bruce Morley & Javier Ordóñez, 2016. "The Taylor Rule, Wealth Effects and the Exchange Rate," Review of International Economics, Wiley Blackwell, vol. 24(2), pages 282-301, May.
    3. Mohammad Enamul Hoque & Soo-Wah Low & Mohd Azlan Shah Zaidi, 2020. "The Effects of Oil and Gas Risk Factors on Malaysian Oil and Gas Stock Returns: Do They Vary?," Energies, MDPI, vol. 13(15), pages 1-22, July.
    4. Mohammad Enamul Hoque & Mohd Azlan Shah Zaidi & M. Kabir Hassan, 2021. "Geopolitical Uncertainties and Malaysian Stock Market Returns: Do Market Conditions Matter?," Mathematics, MDPI, vol. 9(19), pages 1-16, September.
    5. BUI, Duy-Tung & LLORCA, Matthieu & BUI, Thi Mai Hoai, 2018. "Dynamics between stock market movements and fiscal policy: Empirical evidence from emerging Asian economies," Pacific-Basin Finance Journal, Elsevier, vol. 51(C), pages 65-74.

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