Boom-Bust Phases in Asset Prices and Fiscal Policy Behavior
IMF Working Papers, April 1, 2004
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- Boom-Bust Phases in Asset Prices and Fiscal Policy Behavior
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Bibliographic details
- Authors: Ludger Schuknecht, Albert Jaeger
- Published: April 1, 2004
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451847543.001
Summary
- Authors: Ludger Schuknecht, Albert Jaeger
- Date: April 1, 2004
- Core premise: Boom and bust phases in asset prices have become a pervasive feature of macroeconomic developments in many advanced economies. The paper studies fiscal policy during boom-bust phases in asset prices and draws several conclusions.
Key findings
- Expansions and contractions in economic activity during boom-bust phases tend to be highly persistent.
- Cyclical turning points during these phases are harder to forecast.
- The margins of error for output gap estimates can be large during boom-bust phases.
- Conventional estimates of revenue elasticities do not seem to allow an accurate assessment of the fiscal stance and of the strength of underlying fiscal positions during boom-bust phases.
- Boom-bust phases tend to exacerbate already existing procyclical policy biases.
- Boom-bust phases tend to exacerbate political-economy biases toward higher spending and higher public debt ratios.
Policy implications and recommendations
- Recognize that standard fiscal indicators (including output gap estimates and conventional revenue elasticities) may misrepresent the fiscal stance during asset price boom-bust cycles.
- Account for greater persistence of expansions and contractions when designing fiscal policy frameworks and forecasting procedures.
- Incorporate the heightened risk of procyclicality and political-economy pressures into fiscal rules and fiscal governance to guard against biased increases in spending and public debt ratios.
Subjects and keywords
- Subjects: Asset prices, Business cycles, Economic growth, Fiscal policy, Fiscal stance, Output gap, Prices, Production
- Keywords: asset price, asset price boom, asset price downturn, asset price swing, asset prices, boom or bust, Boom-bust cycles, Business cycles, bust phase, cyclical adjustment, deficit bias, Europe, fiscal policy, Fiscal stance, growth rate sequence, identifying asset price swing, Output gap, output growth, price change, price downturn, real asset, WP
Source: IMF Working Papers — Ludger Schuknecht and Albert Jaeger, April 1, 2004.