Fiscal Policy Shocks and the Dynamics of Asset Prices

Abstract

This study assesses how fiscal policy affects the dynamics of asset markets, using Bayesian vector autoregressive models. We use sign restrictions to identify government revenue and government spending shocks, while controlling for generic business cycle and monetary policy shocks. Using South African quarterly data from 1966: Q1 to 2011: Q2, we find that fiscal spending shocks affect stock prices more than house prices. Both spending and revenue shocks affect stock prices whereas only revenue shocks affect house prices.