Using time-varying transition probabilities in Markov switching processes to adjust US fiscal policy for asset prices.

Authors
Publication date
2013
Publication type
Journal Article
Summary This paper tests for nonlinear effects of asset prices on the US fiscal policy. By modeling government spending\ud and taxes as time-varying transition probability Markovian processes (TVPMS), we find that taxes significantly\ud adjust in a nonlinear fashion to asset prices. In particular, taxes respond to housing and (to a smaller\ud extent) to stock price changes during normal times. However, at periods characterized by high financial volatility,\ud government taxation only counteracts stock market developments (and not the dynamics of the housing\ud sector). As for government spending, it is neutral vis-a-vis the asset market cycles. We conclude that,\ud correcting the fiscal balance and, notably, the revenue side for time-varying effects of asset prices provides\ud a more accurate assessment of the fiscal stance and its sustainabilit.
Publisher
Elsevier BV
Topics of the publication
  • ...
  • No themes identified
Themes detected by scanR from retrieved publications. For more information, see https://scanr.enseignementsup-recherche.gouv.fr