FISCAL POLICY AND ASSET PRICES. (21st December 2011)

• Record Type: Journal Article
• Authors: Agnello, Luca; Sousa, Ricardo M.
• Is Part Of: Bulletin of economic research. Volume 65:Number 2(2013:Apr.)
• Page Start: 154
• Page End: 177
• Publication Date: 2011-12-21
• Subjects: Economics -- Periodicals; Great Britain -- Economic conditions -- Periodicals; 330.05
• DOI: 10.1111/j.0307-3378.2011.00420.x
• Languages: English
• ISSNs: 0307-3378

Abstract

<abstract abstract-type="main" xml:lang="en"> <title>ABSTRACT</title> <p>We analyse the impact of fiscal policy on asset prices using a panel vector auto‐regressive (PVAR) approach and quarterly data for ten industrialized countries. We find that positive fiscal shocks lead to a temporary fall in stock prices and a gradual and persistent decrease in housing prices. The empirical findings also point to: (i) a contractionary effect of fiscal policy on output in line with the existence of crowding‐out effects and the deterioration of credit conditions; (ii) a weakening of the effectiveness of fiscal policy in recent times; (iii) a more persistent response of asset prices for countries with a lower degree of openness; (iv) a larger impact of fiscal policy on asset prices for small countries; (v) a close link between the responsiveness of asset prices to fiscal policy and the government's size; (vi) an increase of the sensitivity of asset prices to fiscal policy shocks following the process of financial deregulation and mortgage liberalization; and (vii) significant fiscal multiplier effects in the context of severe housing busts. Finally, the evidence suggests that changes in equity prices may help governments towards consolidation of public finances.</p> </abstract>