Skip to Main content Skip to Navigation
Journal articles

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

Abstract : 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.
Complete list of metadatas

https://hal-amu.archives-ouvertes.fr/hal-01498264
Contributor : Elisabeth Lhuillier <>
Submitted on : Wednesday, March 29, 2017 - 5:32:40 PM
Last modification on : Wednesday, August 5, 2020 - 3:09:10 AM

Identifiers

  • HAL Id : hal-01498264, version 1

Collections

Citation

Luca Agnello, Gilles Dufrénot, Ricardo M. Sousa. Using time-varying transition probabilities in Markov switching processes to adjust US fiscal policy for asset prices. Economic Modelling, 2013, 34 (C), pp.25--36. ⟨hal-01498264⟩

Share

Metrics

Record views

236