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

Public Finance Review, June 2014

33 Pages Posted: 16 Sep 2012 Last revised: 18 Mar 2015

See all articles by Goodness Aye

Goodness Aye

University of Pretoria - Department of Economics

Mehmet Balcilar

Eastern Mediterranean University

Rangan Gupta

University of Pretoria - Department of Economics

Charl Jooste

World Bank

Stephen M. Miller

University of Nevada, Las Vegas - Department of Economics; University of Connecticut - Department of Economics

Zeynel Abidin Ozdemir

IZA Institute of Labor Economics; Economic Research Forum (ERF)

Date Written: September 14, 2012

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

JEL Classification: C32, E62, G10, H62

Suggested Citation

Aye, Goodness and Balcilar, Mehmet and Gupta, Rangan and Jooste, Charl and Miller, Stephen M. and Ozdemir, Zeynel Abidin, Fiscal Policy Shocks and the Dynamics of Asset Prices: The South African Experience (September 14, 2012). Public Finance Review, June 2014, Available at SSRN: https://ssrn.com/abstract=2146947 or http://dx.doi.org/10.2139/ssrn.2146947

Goodness Aye

University of Pretoria - Department of Economics ( email )

Lynnwood Road
Hillcrest
Pretoria, 0002
South Africa

Mehmet Balcilar

Eastern Mediterranean University ( email )

Gazimagusa
Turkey

HOME PAGE: http://www.mbalcilar.net

Rangan Gupta

University of Pretoria - Department of Economics ( email )

Lynnwood Road
Hillcrest
Pretoria, 0002
South Africa

Charl Jooste

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Stephen M. Miller (Contact Author)

University of Nevada, Las Vegas - Department of Economics ( email )

4505 S. Maryland Parkway
Box 456005
Las Vegas, NV 89154
United States
702-895-3776 (Phone)
702-895-1354 (Fax)

HOME PAGE: http://faculty.unlv.edu/smiller/

University of Connecticut - Department of Economics

365 Fairfield Way, U-1063
Storrs, CT 06269-1063
United States

Zeynel Abidin Ozdemir

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Economic Research Forum (ERF) ( email )

21 Al-Sad Al-Aaly St.
(P.O. Box: 12311)
Dokki, Cairo
Egypt

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