Fiscal developments and financial stress: a threshold VAR analysis
| Author(s): | PhDr. Jaromír Baxa Ph.D., António Afonso Mgr. Ing. Michal Slavík M.Sc., António Afonso |
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| Type: | IES Working Papers |
| Year: | 2011 |
| Number: | 16 |
| ISSN / ISBN: | |
| Published in: | IES Working Papers 16/2011 |
| Publishing place: | Prague |
| Keywords: | fiscal policy, financial markets, threshold VAR |
| JEL codes: | E62, G15, H60 |
| Suggested Citation: | Afonso, A., Baxa, J., Slavík, M. (2011). “Fiscal developments and financial stress: a threshold VAR analysis” IES Working Paper 16/2011. IES FSV. Charles University. |
| Grants: | 402/09/0965: New Approaches for monitoring and prediction of capital markets |
| Abstract: | 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 specifically 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. |
| Downloadable: |
WP 2011_16_Afonso, Baxa, Slavik |
