Asset price volatility and government revenue

Athanasios Tagkalakis

No 133, Working Papers from Bank of Greece

Abstract: This paper investigates the effect of commercial, residential property and equity price volatility on the variability of cyclically adjusted government revenue. We find significant evidence that asset price volatility increases the variability of government revenue. A 1 percent increase in equity price volatility increases government revenue variability by 0.37-0.44 percent. An increase in residential property price volatility increases revenue volatility by about 0.15-0.22 percent, whereas this effect diminishes to 0.11 percent in case of commercial property price. This evidence reflects the automatic increase of government revenue variability due to asset price movements and supports arguments in favour of adjusting fiscal variables for both business cycle and asset price changes. However, we also find evidence that equity price variability increases revenue variability even when government revenue is adjusted for both economic and asset price cycles, indicating the presence of more complicated dynamics between fiscal variables and asset price changes.

Keywords: Asset prices; government revenue; volatility; cyclical adjustment. (search for similar items in EconPapers)
JEL-codes: E32 E61 E62 H61 H62 (search for similar items in EconPapers)
Pages: 40
Date: 2011-06
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Citations: View citations in EconPapers (7)

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