ASSET PRICE VOLATILITY AND GOVERNMENT REVENUE
Bank of Greece
This paper investigates the effect of commercial, residential property and equity price volatility on the variability of cyclically adjusted government revenue. We find significant evidence that asset price volatility increases the variability of government revenue. A 1 percent increase in equity price volatility increases government revenue variability by 0.37-0.44 percent. An increase in residential property price volatility increases revenue volatility by about 0.15-0.22 percent, whereas this effect diminishes to 0.11 percent in case of commercial property price. This evidence reflects the automatic increase of government revenue variability due to asset price movements and supports arguments in favour of adjusting fiscal variables for both business cycle and asset price changes. However, we also find evidence that equity price variability increases revenue variability even when government revenue is adjusted for both economic and asset price cycles, indicating the presence of more complicated dynamics between fiscal variables and asset price changes.
Keywords: Asset prices, government revenue, volatility, cyclical adjustment.
JEL classification: E61, E62, H61, H62, E32
Acknowledgements: I would like to thank Mike Artis, Anindya Banerjee, Heather Gibson, Stephen Hall, George Hondroyiannis, Panagiotis Konstantinou, Eric Maskin and Joel Slemrod for comments received in various stages of the paper. I would also like to thank the Bank for International Settlements for kindly providing the asset price data. The views of the paper are my own and do not necessarily reflect those of the Bank of Greece.
Economic Research Department,
Bank of Greece, 21 El. Venizelou Ave.,
10250, Athens, Greece,
Tel.: 0030-210-320 2442