Fiscal developments and financial stress: A threshold VAR analysis

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: IES Working Paper ; No. 16/2011

Classification and Topics

• Classification: Wirtschaft ; Fiscal Policy ; International Financial Markets ; National Budget, Deficit, and Debt: General
• Subject: fiscal policy ; financial markets ; threshold VAR

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Afonso, António ; Baxa, Jaromír ; Slavík, Michal
• Event: Veröffentlichung
• (who): Charles University in Prague, Institute of Economic Studies (IES)
• (where): Prague
• (when): 2011

Further information

• Handle: http://hdl.handle.net/10419/83330
• Last update: 10.03.2025, 11:44 AM CET