A time-varying approach to analysing fiscal policy and asset prices in South Africa

摘要

Purpose - This paper aims to study the interplay of fiscal policy and asset prices in a time-varying fashion. Design/methodology/approach - Using South African data since 1966, the authors are able to study the dynamic shocks of both fiscal policy and asset prices on asset prices and fiscal policy based on a time-varying parameter vector autoregressive (TVP-VAR) model. This enables the authors to isolate specific periods in time to understand the size and sign of the shocks. Findings - The results seem to suggest that at least two regimes exist in which expansionary fiscal policy affected asset prices. From the 1970s until 1990, fiscal expansions were associated with declining house and slightly increased stock prices. The majority of the first decade of 2000 had asset prices increasing when fiscal policy expanded. On the other hand, increasing asset prices reduced deficits for the majority of the sample period, while the recent financial crises had a marked change on the way asset prices affect fiscal policy. Originality/value - This is the first attempt in the literature of fiscal policy and asset prices to use a TVP-VAR model to not only analyse the impact of fiscal policy on asset prices, but also the feedback from asset prices to fiscal policy over time.