THE EFFECT OF ASSET PRICE VOLATILITY ON FISCAL POLICY OUTCOMES
Bank of Greece
This paper examines the effect of asset price volatility on fiscal policy stance. We find that asset price volatility affects the volatility of discretionary fiscal policy in a positive and significant manner, which according to Fatas and Mihov (2003) has negative repercussions on output volatility and economic growth. Higher residential property price volatility amplifies both the volatility of government spending and the volatility of the discretionary fiscal policy stance. Equity price volatility increases the volatility of the fiscal policy stance, primarily via the government revenue channel.
Keywords: Asset prices, fiscal policy, volatility.
JEL classification: E61, E62, H61, H62, E32
Acknowledgements: I would like to thank the BIS for kindly providing the asset price data. I would also like to thank Christos Antonopoulos, Fragiskos Archontakis, Michael Artis, Claudio Borio, Heather Gibson, Panagiotis Konstantinou, Ludger Schuknecht, Pantelis Tagkalakis, Joel Slemrod and Jose Tavares. 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 E. Venizelos Ave.,
10250 Athens, Greece