Asset prices and fiscal balances

Ludger Schuknecht () and Felix Eschenbach ()
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Felix Eschenbach: Erasmus University Rotterdam (EUR) - Erasmus School of Economics, Burgemeester Oudlaan 50, 3062 PA Rotterdam, The Netherlands., http://www.eur.nl/english/

No 141, Working Paper Series from European Central Bank

Abstract: The paper argues that there are important links between asset prices and public finances which can strongly affect the variability of fiscal balances. Asset prices affect fiscal balances via capital gains and turnover related taxes, and via wealth effects on consumption and indirect taxes. The fiscal costs of asset price changes can be higher if government can be held liable for balance sheet losses from an asset price downturn. An empirical study finds significant effects of house and/or stock prices on revenue in a majority of the 17 OECD countries and revenue categories examined. On average, a 10-percent change in real estate and stock prices has a similar effect on the fiscal balance as a 1-percent change in output, although effects differ considerably across countries. By 2001/2002, some countries' fiscal balances seem upward biased, due to positive effects from earlier asset price booms. JEL Classification: H3; H6; E6; G1.

Keywords: Fiscal policies; deficits; asset prices; revenue; fiscal institutions. (search for similar items in EconPapers)
Date: 2002-05
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