Publication detail

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
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

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