Please use this identifier to cite or link to this item: http://hdl.handle.net/1822/22475

TitleAdjusting the U.S. fiscal policy for asset prices : evidence from a TVP--MS framework
Author(s)Agnello, Luca
Dufrénot, Gilles
Sousa, Ricardo M.
KeywordsFiscal policy
Asset prices
Time-varying transition probability Markov
Issue date2012
Abstract(s)This paper tests for nonlinear effects of asset prices on the US fiscal policy. By modeling government spending and taxes as time-varying transition probability (TVTP) Markovian processes, we find that taxes significantly adjust in a nonlinear fashion to asset prices. In particular, taxes respond to housing and (to a smaller extent) to stock prices changes during normal times. However, at periods characterized by high financial volatility, government taxation only counteracts stock market developments (and not the dynamics of the housing sector). As for government spending, it is neutral vis-a-vis the asset market cycles. We conclude that, correcting the fiscal balance and, notably, the revenue side for time-varying effects of asset prices provides a more accurate assessment of the fiscal stance and its sustainability.
TypeWorking paper
URIhttp://hdl.handle.net/1822/22475
Publisher versionhttp://www.eeg.uminho.pt/economia/nipe
Peer-Reviewedno
AccessOpen access
Appears in Collections:NIPE - Documentos de Trabalho

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