Date Added: Sep 2010
The authors assess the role played by fiscal policy in explaining the dynamics of asset markets. Using a panel of ten industrialized countries, they show that a positive fiscal shock has a negative impact in both stock and housing prices. However, while stock prices immediately adjust to the shock and the effect of fiscal policy is temporary, housing prices gradually and persistently fall. As a result, the attempts of fiscal policy to mitigate stock price developments may severely de-stabilize housing markets. The empirical findings also point to: A contractionary effect of fiscal policy on output in line with the existence of crowding-out effects; a effects weakening of the effectiveness of fiscal policy in recent times; significant fiscal multiplier in the context of severe housing busts.