Structural Balances and Revenue Windfalls: The Role of Asset Prices Revisited

47 Pages Posted: 11 Apr 2007

See all articles by Richard Morris

Richard Morris

European Central Bank (ECB)

Ludger Schuknecht

European Central Bank (ECB)

Date Written: March 2007

Abstract

In this paper we revisit one of the "missing links" between budget balances and the economic cycle, namely the impact of asset prices on fiscal revenues. We estimate revenue elasticities with respect to equity and real estate price indices for 16 OECD countries, as well as for a synthetic euro area aggregate. For a sub-sample of euro area countries, we use these elasticities to investigate the impact of asset prices on budget balances and the assessment of the fiscal stance by adjusting existing estimates of cyclically adjusted balances for the asset price "cycle". The results support the view that asset price movements are a major factor behind unexplained changes in the cyclically adjusted balance, which, if not accounted for, can lead to erroneous conclusions regarding underlying fiscal developments.

Keywords: Fiscal policies, deficits, asset prices, tax revenues

JEL Classification: H2, H6, E6, G1

Suggested Citation

Morris, Richard and Schuknecht, Ludger, Structural Balances and Revenue Windfalls: The Role of Asset Prices Revisited (March 2007). ECB Working Paper No. 737. Available at SSRN: https://ssrn.com/abstract=970621

Richard Morris (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Ludger Schuknecht

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+49 69 1344 6494 (Phone)
+49 69 1344 7809 (Fax)

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