Abstract:
This paper studies the interplay of fiscal policy and asset prices in a time varying
parameter VAR. Using South African data since 1966 we are able to study the dynamic
shocks of both fiscal policy and asset prices on asset prices and fiscal policy. This
enables us to isolate specific periods in time to understand the size and sign of the
shocks. The results seem to suggest that at least two regimes exist in which
expansionary fiscal policy affected asset prices. From the 1970's until 1990 fiscal
expansions were associated with declining house and slightly increased stock prices.
The majority of 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.
