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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)

  • Mehmet Balcilar

    () (Department of Economics, Eastern Mediterranean University, Famagusta, North Cyprus,via Mersin 10, Turkey)

  • Rangan Gupta

    () (Department of Economics, University of Pretoria)

  • Charl Jooste

    () (Department of Economics, University of Pretoria)

  • Stephen M. Miller

    () (College of Business, University of Las Vegas, Nevada)

  • Zeynel A. Ozdemir

    () (Department of Economics, Gazi University, Besevler, 06500 Ankara, Turkey)


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.

Suggested Citation

  • Goodness C. Aye & Mehmet Balcilar & Rangan Gupta & Charl Jooste & Stephen M. Miller & Zeynel A. Ozdemir, 2012. "Fiscal Policy Shocks and the Dynamics of Asset Prices: The South African Experience," Working Papers 201228, University of Pretoria, Department of Economics.
  • Handle: RePEc:pre:wpaper:201228

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    References listed on IDEAS

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    Cited by:

    1. Rangan Gupta & Chi Keung Marco Lau & Stephen M. Miller & Mark E. Wohar, 2017. "U.S. Fiscal Policy and Asset Prices: The Role of Partisan Conflict," Working papers 2017-10, University of Connecticut, Department of Economics.
    2. Ghassen El Montasser & Rangan Gupta & Charl Jooste & Stephen M. Miller, 2015. "The Time-Series Linkages between US Fiscal Policy and Asset Prices," Working Papers 201519, University of Pretoria, Department of Economics.
    3. Rangan Gupta & Charl Jooste & Kanyane Matlou, 2014. "A time-varying approach to analysing fiscal policy and asset prices in South Africa," Journal of Financial Economic Policy, Emerald Group Publishing, vol. 6(1), pages 46-63, April.
    4. Alexander Zimper, 2014. "The minimal confidence levels of Basel capital regulation," Journal of Banking Regulation, Palgrave Macmillan, vol. 15(2), pages 129-143, April.
    5. Isabel Ruiz & Carlos Vargas-Silva, 2016. "The impacts of fiscal policy shocks on the US housing market," Empirical Economics, Springer, vol. 50(3), pages 777-800, May.
    6. repec:rfe:zbefri:v:34:y:2016:i:1:p:43-61 is not listed on IDEAS
    7. Aye, Goodness C. & Balcilar, Mehmet & Bosch, Adél & Gupta, Rangan, 2014. "Housing and the business cycle in South Africa," Journal of Policy Modeling, Elsevier, vol. 36(3), pages 471-491.
    8. Xiao-lin Li & Mehmet Balcilar & Rangan Gupta & Tsangyao Chang, 2016. "The Causal Relationship Between Economic Policy Uncertainty and Stock Returns in China and India: Evidence from a Bootstrap Rolling Window Approach," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 52(3), pages 674-689, March.

    More about this item


    Bayesian Sign-Restricted VAR; fiscal policy; housing prices; stock prices;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus

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