Original title: Fiscal developments and financial stress: a threshold VAR analysis
Authors: Baxa, Jaromír ; Afonso, Antonio ; Slavík, M.
Document type: Research reports
Year: 2011
Language: eng
Series: Research Report, volume: 2299
Abstract: 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.
Keywords: financial markets; fiscal policy; threshold VAR
Project no.: CEZ:AV0Z10750506 (CEP), GA402/09/0965 (CEP)
Funding provider: GA ČR

Institution: Institute of Information Theory and Automation AS ČR (web)
Document availability information: Fulltext is available at external website.
External URL: http://library.utia.cas.cz/separaty/2011/E/baxa-0360356.pdf
Original record: http://hdl.handle.net/11104/0197927

Permalink: http://www.nusl.cz/ntk/nusl-55747


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