Fiscal developments and financial stress : a threshold VAR analysis

• Autor(es): Afonso, António ; Baxa, Jaromír ; Slavík, Michal
• Data: 2011
• Identificador Persistente: http://hdl.handle.net/10400.5/3292
• Origem: Repositório da UTL
• Assunto(s): Fiscal policy; Financial markets; Threshold VAR
• Tipo de Documento: Outro
• Idioma: Inglês

Descrição

We use a threshold VAR analysis to study whether the effects of fiscal policy on economic activity differ depending on financial market conditions. In particular, we investigate the possibility of a non-linear propagation of fiscal developments according to different financial market stress regimes. More speciffically we employ a quarterly dataset, for the U.S., the U.K., Germany and Italy, for the period 1980:4-2009:4, encompassing macro, fiscal and financial variables. The results show that (i) the use of a nonlinear framework with regime switches is corroborated by nonlinearity tests; (ii) the responses of economic growth to a fiscal shock are mostly positive in both financial stress regimes; (iii) financial stress has a negative effect on output growth and worsens the fiscal position; (iv) the nonlinearity in the response of output growth to a fiscal shock is mainly associated with different behaviour across regimes; (v) the size of the fiscal multipliers is higher than average in the last crisis.