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Nonlinear effects of asset prices on fiscal policy: evidence from the UK, Italy and Spain

Agnello, Luca and Dufrénot, Gilles and Sousa, Ricardo M. (2014) Nonlinear effects of asset prices on fiscal policy: evidence from the UK, Italy and Spain. Economic Modelling, 44. pp. 358-362. ISSN 0264-9993

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Identification Number: 10.1016/j.econmod.2014.07.024

Abstract

We test for nonlinear effects of asset prices on the fiscal policy of three major European economies (the UK, Italy and Spain). We model primary government spending and government revenue as time-varying transition probability Markovian processes (TVPMS). We find that while in Italy fiscal policy is substantially neutral vis-à-vis asset price movements, fiscal authorities in the UK and Spain seem to track the dynamics of wealth. In particular, revenue-based fiscal policy interventions in the UK are particularly effective in counteracting shocks in the asset markets induced by sharp wealth fluctuations. Similarly, in Spain, the spending-side of the fiscal policy plays a dominant role in stabilizing stock and housing markets.

Item Type: Article
Official URL: http://www.journals.elsevier.com/
Additional Information: © 2014 Elsevier B.V. All rights reserved.
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HC Economic History and Conditions
Date Deposited: 19 Aug 2014 14:17
Last Modified: 19 Jan 2015 10:50
URI: http://eprints.lse.ac.uk/id/eprint/59059

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