Fiscal Policy and Financial Market Movements
92 Pages Posted: 21 Jul 2022
Date Written: July 1, 2010
Abstract
This paper estimates a fiscal policy reaction function in order to investigate the links between financial and real estate market movements and fiscal policy outcomes. An increase in asset prices affects in a positive and significant manner primary balances, with the response reflecting both an increase in government revenues and a fall in government spending. The most important impact on fiscal balances is due to changes in residential property prices. Changes in equity and commercial property prices are also important determinants of fiscal balances. Our findings suggest that the steepening of the slope of the yield curve contributes to expenditure based fiscal discipline.
Keywords: Asset prices, slope of the yield curve, fiscal policy, reaction functions
JEL Classification: E61, E62, H61, H62, E32
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