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Fiscal Policy and Asset Prices

Luca Agnello () and Ricardo Sousa

No 25/2010, NIPE Working Papers from NIPE - Universidade do Minho

Abstract: We assess the role played by fiscal policy in explaining the dynamics of asset markets. Using a panel of ten industrialized countries, we show that a positive fiscal shock has a negative impact in both stock and housing prices. However, while stock prices immediately adjust to the shock and the effect of fiscal policy is temporary, housing prices gradually and persistently fall. As a result, the attempts of fiscal policy to mitigate stock price developments may severely de-stabilize housing markets. The empirical findings also point to: (i) a contractionary effect of fiscal policy on output in line with the existence of crowding-out effects; (ii) a weakening of the effectiveness of fiscal policy in recent times; (iii) significant fiscal multiplier effects in the context of severe housing busts; and (iv) an increase of the sensitivity of asset prices to fiscal policy shocks following the process of financial deregulation and mortgage liberalization. Finally, the evidence suggests that changes in equity prices may help governments towards consolidation of public finances.

Keywords: fiscal policy; asset prices; panel VAR. (search for similar items in EconPapers)
JEL-codes: E62 H30 (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-cba, nep-mac and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (22)

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Journal Article: FISCAL POLICY AND ASSET PRICES (2013) Downloads
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