Nonlinear effects of asset prices on fiscal policy: Evidence from the UK, Italy and Spain

Luca Agnello (), Gilles Dufrénot () and Ricardo Sousa

Economic Modelling, 2015, vol. 44, issue C, 358-362

Abstract: We test for nonlinear effects of asset prices on the fiscal policy of three major European economies (the UK, Italy and Spain). We model primary government spending and government revenue as time-varying transition probability Markovian processes (TVPMS). We find that while in Italy fiscal policy is substantially neutral vis-à-vis asset price movements, fiscal authorities in the UK and Spain seem to track the dynamics of wealth. In particular, revenue-based fiscal policy interventions in the UK are particularly effective in counteracting shocks in the asset markets induced by sharp wealth fluctuations. Similarly, in Spain, the spending-side of the fiscal policy plays a dominant role in stabilizing stock and housing markets.

Keywords: Fiscal policy; Asset prices; Time-varying probability; Markov process (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:44:y:2015:i:c:p:358-362

DOI: 10.1016/j.econmod.2014.07.024

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