Boom-Bust Phases in Asset Prices and Fiscal Policy Behavior

Ludger Schuknecht and Albert Jaeger

No 2004/054, IMF Working Papers from International Monetary Fund

Abstract: Boom and bust phases in asset prices have become a pervasive feature of macroeconomic developments in many advanced economies. This paper studies fiscal policy during boom-bust phases in asset prices and draws several conclusions. First, expansions and contractions in economic activity during such boom-bust phases tend to be highly persistent, cyclical turning points are harder to forecast, and the margins of error for output gap estimates can be large. Second, conventional estimates of revenue elasticities seem not to allow an accurate assessment of the fiscal stance and of the strength of underlying fiscal positions during boom-bust phases. And third, boom-bust phases tend to exacerbate already existing procyclical policy biases, as well as political-economy biases, toward higher spending and public debt ratios.

Keywords: WP; asset price; output growth; real asset; boom or bust; Boom-bust cycles; fiscal policy; asset prices; cyclical adjustment; deficit bias; bust phase; asset price downturn; growth rate sequence; asset price swing; price downturn; identifying asset price swing; asset price boom; price change; Fiscal stance; Business cycles; Output gap; Europe (search for similar items in EconPapers)
Pages: 36
Date: 2004-04-01
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Citations: View citations in EconPapers (16)

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Journal Article: Boom-Bust Phases in Asset Prices and Fiscal Policy Behavior (2007)
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