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

  • Goodness C. Aye

    ()

    (Department of Economics, University of Pretoria, Pretoria)

  • Mehmet Balcilar

    ()

    (Department of Economics, Eastern Mediterranean University)

  • Rangan Gupta

    ()

    (Department of Economics, University of Pretoria)

  • Charl Jooste

    ()

    (Department of Economics, University of Pretoria, Pretoria)

  • Stephen M. Miller

    ()

    (Department of Economics, University of Nevada, Las Vegas)

  • Zeynel Abidin Ozdemir

    ()

    (Department of Economics, Gazi University)

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.

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File URL: http://web.unlv.edu/projects/RePEc/pdf/1211.pdf
File Function: First version, 2012
Download Restriction: no

Paper provided by University of Nevada, Las Vegas , Department of Economics in its series Working Papers with number 1211.

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Length: 33 pages
Date of creation: Aug 2012
Date of revision:
Handle: RePEc:nlv:wpaper:1211
Contact details of provider: Phone: (702) 895-3776
Fax: (702) 895-1354
Web page: http://business.unlv.edu/econ/

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