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

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.