Can fiscal policy stimulus boost economic recovery?

Luca Agnello, Ricardo M. Sousa, Luca Agnello

Research output: Contribution to journalArticlepeer-review

19 Citations (Scopus)


We assess the role played by fiscal policy in explaining the dynamics of asset markets. Using a panel of ten industrialized countries, we show that a positive fiscal shock has a negative impact in both stock and housing prices. However, while stock prices immediately adjust to the shock and the effect of fiscal policy is temporary, housing prices gradually and persistently fall. Consequently, the attempts of fiscal policy to mitigate stock price developments (e.g. via taxes on capital gains) may severely de-stabilize housing markets. The empirical findings also point to significant fiscal multiplier effects in the context of severe housing busts, which gives rise to the importance of the implementation of fiscal stimulus packages. In addition, our results suggest that when governments run a budget deficit, they place an upward pressure on real interest rates, which “crowds-out” private consumption and investment. In contrast, during bust periods, unexpected variation in the fiscal stance “ crowds-in” private spending, which reflects the “direct” and “indirect” effects of policy actions’ impact arising from a downward movement in real interest rates and an upward revision in price level expectations.
Original languageEnglish
Pages (from-to)1045-1066
Number of pages22
Publication statusPublished - 2011

All Science Journal Classification (ASJC) codes

  • General Economics,Econometrics and Finance


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