Fiscal developments and financial stress: a threshold VAR analysis

0360356 - ÚTIA 2012 CZ eng V - Research Report
Baxa, Jaromír - Afonso, Antonio - Slavík, M.
Fiscal developments and financial stress: a threshold VAR analysis.
Praha: ÚTIA AV ČR, 2011. 56 s. Research Report, 2299.
R&D Projects: GA ČR GA402/09/0965
Institutional research plan: CEZ:AV0Z10750506
Keywords : fiscal policy * threshold VAR * financial markets
Subject RIV: AH - Economics
http://library.utia.cas.cz/separaty/2011/E/baxa-0360356.pdf

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.
Permanent Link: http://hdl.handle.net/11104/0197927