Please use this identifier to cite or link to this item: http://hdl.handle.net/1822/23354

TitleUsing time-varying transition probabilities in Markov switching processes to adjust US fiscal policy for asset prices
Author(s)Agnello, Luca
Dufrénot, Gilles
Sousa, Ricardo M.
KeywordsFiscal policy
Asset prices
Time-varying transition probability
Markov process
Time-varying transition probability Markov process
Issue dateFeb-2013
PublisherElsevier
JournalEconomic Modelling
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 Markovian processes (TVPMS), 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 price 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.
TypeArticle
URIhttp://hdl.handle.net/1822/23354
DOI10.1016/j.econmod.2012.11.054
ISSN0264-9993
Publisher versionhttp://ac.els-cdn.com/S0264999312004117/1-s2.0-S0264999312004117-main.pdf?_tid=0ce5bd5c-8a2b-11e2-9536-00000aab0f6b&acdnat=1362993007_a2543b47622e0ce38406d73a6bcdd8f6
Peer-Reviewedyes
AccessRestricted access (UMinho)
Appears in Collections:NIPE - Artigos em Revistas de Circulação Internacional com Arbitragem Científica

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