Fiscal policy and asset price volatility

Abstract

This paper investigates the relationship between volatility of different asset prices and the volatility of various indicators of fiscal policy (primary balance, spending and revenue). We find evidence that asset price volatility affects the volatility of fiscal policy stance in a positive and significant way. The effect comes primarily through residential property and equity price volatility on government revenue and spending. Increased volatility in commercial property prices is associated with increased variability of government revenue. Output growth volatility is the dominant determinant of revenue and primary balance variability, whereas bad budgetary conditions and the size of the public sector are the most significant determinants of spending variability. Trade openness leads to greater variability of government spending, revenue and primary balance to GDP ratios.