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Fiscal Policy Shocks and the Dynamics of Asset Prices: The South African Experience

Goodness C. Aye, Mehmet Balcilar (), Rangan Gupta (), Charl Jooste (), Stephen Miller () and Zeynel Ozdemir
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Goodness C. Aye: Department of Economics, University of Pretoria

No 15-24, Working Papers from Eastern Mediterranean University, Department of Economics

Abstract: This study assesses how fiscal policy affects the dynamics of asset markets, using Bayesian vector autoregressive models. We use sign restrictions to identify government revenue and government spending shocks, while controlling for generic business cycle and monetary policy shocks. In addition to examining the effects of anticipated and unanticipated revenue and spending shocks, we also analyse three types of fiscal policy scenarios: a deficit-financed spending increase, a balanced budget spending increase (financed with higher taxes), and a deficit-financed tax cut (revenue decreases but government spending stays unchanged). Using South African quarterly data from 1966:Q1 to 2011:Q2, we show that a deficit spending shock does not affect house prices, but temporarily exerts a positive effect on stock prices. With a deficit-financed tax cut shock, house prices increase persistently while stock prices increase quickly, but only temporarily. A balanced budget shock permanently decreases house prices and temporarily reduces stock prices.

Keywords: Bayesian Sign-Restricted VAR; fiscal policy; housing prices; stock prices (search for similar items in EconPapers)
JEL-codes: C32 E62 G10 H62 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac, nep-pbe and nep-ure
Date: 2014
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http://repec.economics.emu.edu.tr/RePEc/emu/wpaper/15-24.pdf First version, 2014 (application/pdf)

Related works:
Working Paper: Fiscal Policy Shocks and the Dynamics of Asset Prices: The South African Experience (2012) Downloads
Working Paper: Fiscal Policy Shocks and the Dynamics of Asset Prices: The South African Experience (2012)
Working Paper: Fiscal Policy Shocks and the Dynamics of Asset Prices: The South African Experience (2012) Downloads
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