Fiscal policy and financial market movements
Tagkalakis, Athanasios
Journal of Banking and Finance, 2011, Vol.35(1), pp.231-251 [Peer Reviewed Journal]
examine the impact of changes in aggregate asset prices, residential, commercial property and equity prices, as well as the effect of the difference between long and short term nominal interest rates on fiscal balances
literature:
Gali and Perotti, 2003
Celasun et al., 2006
Golinelli and Monigliano, 2009
findings:
primary balances respond conutercyclically over the cycle, reflecting a pro cyclical current revenue and counter cyclical current spending behaviour
the discretionary response of fiscal policy makers to cyclical economic conditions is not so pronounced
the automatic and the discretionary fiscal policy responses work in the same direction in the first part of the sample; therefore, in the period 1991-2005, a fall in the output gap variable generates a negative automatic response in fiscal balances which is countered by a positive discretionary response
the steepening of the slope of the yield curve contributes to fiscal discipline, it improves fiscal balances by inducing expenditure cuts
there is evidence that an increase in asset prices affects in a positive and significant manner primary balances
the importance of commercial property prices has diminished
residential property and equity prices have become more important determinants of primary balances
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