Abstract:
This study assesses how fiscal policy affects the dynamics of asset markets, using Bayesian
vector autoregressive models. We use sign restrictions to identify government revenue and
government spending shocks, while controlling for generic business cycle and monetary policy
shocks. Using South African quarterly data from 1966:Q1 to 2011:Q2, we find that fiscal
spending shocks affect stock prices more than house prices. Both spending and revenue shocks
affect stock prices whereas only revenue shocks affect house prices.
