Asset Values and Policy Changes: The Case of Denmark

22 Pages Posted: 18 Sep 1996

See all articles by Silverio Foresi

Silverio Foresi

Goldman Sachs Group, Inc. - Quantitative Strategy Group

Pierluigi Balduzzi

Boston College - Carroll School of Management

Giancarlo Corsetti

University of Cambridge; University of Rome III - Department of Economics; Centre for Economic Policy Research (CEPR)

Abstract

At the end of 1982 Denmark implemented a fiscal stabilization program which led to an economic expansion. This expansionary effect, as Giavazzi and Pagano (1990) and Bertola and Drazen (1993) argue, should be expected if consumers are forward- looking and the stabilization program is anticipated. This paper asks whether a similar model of forward-looking consumers is also capable of explaining the behavior of asset prices around the time of the stabilization. We argue that the behavior of Danish financial markets points in the direction of two interesting features of the policy change. First, in a model of intertemporal consumption smoothing, the observed stock market rally suggests that investors expected an increase in after-tax dividends. The term-structure evidence, on the other hand, is consistent with less than full credibility of the retrenchment, that is with investors attaching some probability to a further expansion of the government sector.

JEL Classification: E62, E63, E65, G12

Suggested Citation

Foresi, Silverio and Balduzzi, Pierluigi and Corsetti, Giancarlo, Asset Values and Policy Changes: The Case of Denmark. Available at SSRN: https://ssrn.com/abstract=1349 or http://dx.doi.org/10.2139/ssrn.1349

Silverio Foresi (Contact Author)

Goldman Sachs Group, Inc. - Quantitative Strategy Group ( email )

32 Old Slip, 24th Floor
New York, NY 10005
United States
(212) 357-3508 (Phone)

Pierluigi Balduzzi

Boston College - Carroll School of Management ( email )

Department of Finance
140 Commonwealth Avenue - Fulton Hall 438
Chestnut Hill, MA 02467
United States
617-552-3976 (Phone)
617-552-0431 (Fax)

HOME PAGE: http://www.bc.edu/bc_org/avp/csom/faculty/

Giancarlo Corsetti

University of Cambridge ( email )

University of Rome III - Department of Economics ( email )

via Ostiense 139
Rome, 00154
Italy
+39 06 5737 4056 (Phone)
+39 06 5737 4093 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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