جنبش های سیاست مالی و بازار مالی

This paper estimates fiscal policy reaction function in order to investigate the links between financial market movements and fiscal policy outcomes. An increase in asset prices affects in a positive and significant manner primary balances, with the response reflecting both an increase in government revenues and a fall in government spending. The most important impact on fiscal balances is due to changes in residential property prices. Changes in equity and commercial property prices are also important determinants of fiscal balances. Our findings suggest that the steepening of the slope of the yield curve contributes to expenditure based fiscal discipline.

In the midst of recent macroeconomic and financial market crisis fiscal policy making has been at the forefront. Several governments around the globe have decided to undertake a significant fiscal impulse to boost economic activity. These actions involved both discretionary demand boosting measures, as well as measures to restore financial stability in the banking sector, i.e., equity injections, subsidies, asset purchases, loan guarantees, etc. The recent economic and financial market developments go hand in hand with a significant fall in asset prices, which in several asset classes and countries resemble the case of an asset price bust, following several years of asset price boom (e.g., house price developments in Ireland, the UK, Spain and the US). These developments had significant implications on fiscal balances, both through automatic and discretionary fiscal policy responses. As economic conditions improve the policy focus will shift to the sustainability of fiscal positions implying that governments will start withdrawing the sizeable fiscal policy stimulus packages and the financial sector support schemes. In view of the forthcoming gradual economic recovery asset prices have started to improve (see IMF, 2010), which provides a boost to public finances, through the revenue channel. However, given that uncertainty remains high and that the recovery might be more gradual than expected this could have significant effects, in terms of volatility, on asset markets and asset prices, which have a negative feedback effect on fiscal balances and the fiscal consolidation effort. The on-going crisis is a very rare episode in terms of its severe and world wide implications and because of the strong and coordinated policy responses that followed it. However, it could certainly imply that fiscal policy makers might put more of their attention on financial and real estate market developments and might try to avert analogous events in future years.1 Therefore, it is of real interest to better understand fiscal responses to financial market developments, as well as to economic shocks, and how the two interrelate and constrain government reaction. While there has been an extensive literature on the appropriate monetary policy making in response to financial market (and in particular asset price) movements (see Borio and Lowe, 2002 and Bordo and Jeanne, 2002), the literature on the appropriate fiscal policy response is far less developed. In addition, there is only limited empirical evidence on the linkages between government finances and asset prices and on whether fiscal policy has been affected by asset prices changes. A series of recent contributions investigate the effects that financial market movements and in particular asset price changes have on fiscal balances (see Eschenbanch and Schuknecht, 2002, Jaeger and Schuknecht, 2004, Tujula and Wolswijk, 2007 and Morris and Schucknecht, 2007).2 These were motivated by the asset price boom of the late 1990s and the windfall revenues it generated, which were then deemed as being of a structural nature leading to permanent improvement in fiscal positions. However, the subsequent burst of the asset price bubble led to a significant deterioration of fiscal balances, hindering the sustainability of fiscal positions and limiting the budgetary room for maneuver during the downturn of the early 2000s. Therefore, most contributions focus on whether fiscal revenues should be adjusted both for the economic and the asset price cycle. Another class of studies, e.g., Honohan and Klingebiel, 2003, Schuknecht and Eschenbanch, 2004, Reinhart and Rogoff, 2009 and European Commission, 2009, discuss in detail the fiscal implications of past financial and banking crises.3 The present paper builds on these earlier contributions and investigates the links between financial market movements and fiscal policy developments. It goes beyond the aforementioned studies (i.e., on whether government revenues should be adjusted both for the economic and the asset price cycle) in that it investigates, by means of fiscal policy reaction functions (see Gali and Perotti, 2003 and Golinelli and Momigliano, 2009) whether there is any evidence that fiscal balances (primary balances, current expenditure and current revenue) have been affected by or responded to financial and real estate market movements (i.e., changes in residential, commercial property and equity prices and changes in the slope of the yield curve). These issues are particularly relevant and should be taken on board by policy makers because financial market developments (like a steeper yield curve) might reflect market concerns regarding the sustainability of a country’s fiscal position. Furthermore, asset price movements are relevant for the following reasons: (1) they should be controlled for in order for the policy maker to have a better grasp of the actual cyclically adjusted fiscal stance4; (2) they could carry information on cyclical economic conditions, on top of the information provided by economic activity variables. This would imply that fiscal policy makers should build up fiscal buffer (e.g., by using windfall revenues) for rainy days to come when economic conditions are good and when asset prices are booming. Our findings suggest that financial market variables have a quite significant impact on fiscal positions. An increase in asset prices affects in a positive and significant manner primary balances, with the response reflecting both an increase in government revenues and a cut in government spending. The most important impact on fiscal balances is due to changes in residential property prices. Equity price changes and commercial property price changes are also significant determinants of fiscal balances. The importance of residential property and equity prices as determinants of primary balances has increased over the course of the years. The effect of residential property prices, in recent years, reflects an automatic rather than a discretionary response of cyclically adjusted fiscal balances. In the case of equity prices, there is both an automatic and a discretionary response. The steepening of the slope of the yield curve contributes to fiscal discipline, in particular in recent years, by inducing expenditure cuts. Section 2 discusses potential channels of interaction between financial and real estate market movements and budgetary outcomes. Section 3 discusses methodological issues and presents the data and the empirical model. Section 4 presents the main findings. Robustness analysis is conducted in Section 5. The last section summarizes the main findings and concludes.

In this paper we investigate the links between financial and real estate market movements and fiscal policy outcomes. We examine the impact of changes in aggregate asset prices, residential, commercial property and equity prices, as well as the effect of the difference between long and short term nominal interest rates on fiscal balances. The objective is to improve our understanding on whether financial market movements affect the conduct of fiscal policy making. In order to do that we estimate standard fiscal policy reaction functions, as in Gali and Perotti, 2003, Celasun et al., 2006 and Golinelli and Momigliano, 2009, augmented with financial and real estate market variables. Our primary focus is on primary balances, current expenditure excluding interest payments and current revenues excluding interest receipts. As a robustness test we investigate also cyclically adjusted primary balances, which better reflect the discretionary response of the fiscal policy maker. Following other studies that have found a changing effect of fiscal policy over the years (either due to financial innovation and development or due to rising debt ratios) we split the sample in two sub-periods: 1970–1990 and 1991–2005. The main findings are that primary balances respond countercyclically over the cycle, reflecting a procyclical current revenue and counter cyclical current spending behaviour. This response incorporates both the automatic and systematic discretionary response of the fiscal policy maker. However, the discretionary response of fiscal policy makers (cyclically adjusted primary balances) to cyclical economic conditions is not so pronounced. Fiscal policy was counter-cyclical in the period 1970–1990 and switched to becoming a-cyclical or even procyclical in the more recent period 1991–2005. This finding is even more pronounced when considering the cyclically adjusted primary balances. The automatic and the discretionary fiscal policy responses work in the same direction in the first part of the sample, whereas in the latter part they work in opposite directions. Therefore, in the period 1991–2005, a fall in the output gap variable generates a negative automatic response in fiscal balances which is countered by a positive discretionary response, i.e., fiscal policy is conducted in a procyclical manner in worse economic conditions. This procyclical response possibly reflects a global tendency towards fiscal prudence.50 Turning to the financial variables, the steepening of the slope of the yield curve contributes to fiscal discipline, in particular in recent years. It improves fiscal balances by inducing expenditure cuts, which could possibly reflect market pressures to pursue expenditure based fiscal consolidation. There is evidence that an increase in asset prices affects in a positive and significant manner primary balances. The increase in primary balance is driven by an increase in government revenues and a cut back in spending. The most important impact on fiscal balances is due to changes in residential property prices. Equity price changes and commercial property price changes affect fiscal balances, but they are of secondary importance. Residential property and equity prices have become more important determinants of primary balances over the course of the years, whereas the importance of commercial property prices has diminished. These findings verify the increasing impact of residential property prices changes on current revenues and spending over the years. Nevertheless, in more recent years, the effect of residential property prices reflects primarily an automatic rather than a discretionary response of cyclically adjusted fiscal balances. In the case of equity prices, there is both an automatic and discretionary response. Overall, we see that asset prices have a significant (although not particularly sizeable) effect on both cyclically adjusted and unadjusted fiscal balances. This implies that following an increase in asset prices there is significant positive automatic response of fiscal balances and, at times, a significant discretionary response (in particular, as regards government spending changes). The latter could imply that asset price movements are relevant indicators of cyclical economic conditions and provide valuable information, on top of what is reflected in output gap movements. In this case, policy makers could, for example, start building up fiscal buffers for the raining days to come. Alternatively, it might be the case that fiscal policy makers do not react in a discretionary manner to asset price changes (in particular, as regards government revenue changes). This means that the impact that asset price variables have on cyclically adjusted primary balances merely reflects the fact that the fiscal stance is contaminated by asset price effects, which means that the policy maker does not have a full grasp of his/her decision or policy variable (i.e., the cyclically adjusted fiscal stance).51 Consequently, this will affect his/her decisions and his/her ability to effectively stabilize cyclical economic activity and to take permanent measures to address debt sustainability issues. Therefore policy makers should take on board financial market developments (like the steepening of the yield curve) because they might reflect market concerns regarding the sustainability of a country’s fiscal position. Furthermore, asset price movements are relevant for three reasons. First, asset price changes should be controlled for in order for the policy maker to have a better grasp of the actual cyclically adjusted fiscal stance.52 Second, because asset price movements could carry information on cyclical economic conditions, on top of the information provided by economic activity variables. For example, asset prices might be booming, whereas output gap might be pointing to output being still below trend. Third, because asset price changes, in particular abrupt asset price movements, could provide information on forthcoming low probability events, such as financial instability and widespread financial crisis. The current crisis is the best example, the collapse in the US housing market that started in the second semester of 2007 spread to the US banking and financial system, leading, in particular after the collapse of the Lehman Brothers in autumn 2008, to worldwide financial crisis, instability and economic recession. These reasons point to the need for the fiscal policy makers to act proactively and build up fiscal buffers when economic conditions are good and when asset prices are booming. These fiscal buffers should be build primarily by the automatic improvement in fiscal balances (revenues), without, however, excluding additional discretionary action.