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
Date Written: September 14, 2012
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: Suggested Citation