Fiscal developments and financial stress: a threshold VAR analysis

Antonio Afonso, Jaromir Baxa and Michal Slavík

No 2011/11, Working Papers Department of Economics from ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa

Abstract: We use a threshold VAR analysis to study whether the effects of fiscal policy on economic activity differ depending on financial market conditions. In particular, we investigate the possibility of a non-linear propagation of fiscal developments according to different financial market stress regimes. More specifically we employ a quarterly dataset, for the U.S., the U.K., Germany and Italy, for the period 1980:4-2009:4, encompassing macro, fiscal and financial variables. The results show that (i) the use of a nonlinear framework with regime switches is corroborated by nonlinearity tests; (ii) the responses of economic growth to a fiscal shock are mostly positive in both financial stress regimes; (iii) financial stress has a negative effect on output growth and worsens the fiscal position; (iv) the nonlinearity in the response of output growth to a fiscal shock is mainly associated with different behaviour across regimes; (v) the size of the fiscal multipliers is higher than average in the last crisis.

Keywords: fiscal policy; financial markets; threshold VAR. (search for similar items in EconPapers)
JEL-codes: E62 G15 H60 (search for similar items in EconPapers)
Date: 2011-03
New Economics Papers: this item is included in nep-eec, nep-fdg and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (70)

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Related works:
Journal Article: Fiscal developments and financial stress: a threshold VAR analysis (2018)
Working Paper: Fiscal developments and financial stress: a threshold VAR analysis (2011)
Working Paper: Fiscal developments and financial stress: a threshold VAR analysis (2011)
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