6533b825fe1ef96bd12829ba
RESEARCH PRODUCT
Using time-varying transition probabilities in Markov switching processes to adjust US fiscal policy for asset prices
Gilles DufrénotLuca AgnelloRicardo M. SousaRicardo M. Sousasubject
MacroeconomicsEconomics and Econometricsasset pricesprobabilitySocial SciencesMarkov process[SHS]Humanities and Social Sciencessymbols.namesakeMarkov0502 economics and businessEconomicsRevenueMarkov processprocessAsset (economics)050207 economics050205 econometrics Time-varying transition probabilityGovernment spendingGovernmentMarkov chain05 social sciencesTime-varying transition probability Markov processSettore SECS-P/02 Politica Economicatransition[SHS.ECO]Humanities and Social Sciences/Economics and FinanceAsset pricesFiscal policyTime-varyingAsset pricesymbolsStock marketFiscal policydescription
This paper tests for nonlinear effects of asset prices on the US fiscal policy. By modeling government spending and taxes as time-varying transition probability Markovian processes (TVPMS), we find that taxes significantly adjust in a nonlinear fashion to asset prices. In particular, taxes respond to housing and (to a smaller extent) to stock price changes during normal times. However, at periods characterized by high financial volatility, government taxation only counteracts stock market developments (and not the dynamics of the housing sector). As for government spending, it is neutral vis-a-vis the asset market cycles. We conclude that, correcting the fiscal balance and, notably, the revenue side for time-varying effects of asset prices provides a more accurate assessment of the fiscal stance and its sustainability.
| year | journal | country | edition | language |
|---|---|---|---|---|
| 2013-02-01 |