SFB 303 Discussion Paper No. A - 312

Author: Eckwert, Bernhard
Title: Stochastic And Structural Fiscal Policy In A Monetary Stationary Economy
Abstract: In the framework of a monetary asset pricing model which is simple enough to generate closed form formulae for equilibrium price functions the interactions between output, fiscal policy, and asset markets is investigated. With money yielding liquidity services in the exchange process real stock prices are negatively correlated with anticipated (stochastic) fiscal policy changes, while the impact of unticipated (structural) fiscal policy on the stock market depends qualitatively on the 'business cycle' of the economy. It is shown that the monetary character of the economy, more precisely the role of money in the exchange process, is critical for the relationship between fiscal policy and real share prices. Moreover, while contingent fiscal policy measures may be successful in stabilizing the real interest rate on money they are uncapable to achieve a stable term structure of the real rate on stocks. In contrast, uncontingently higher public expenditures generally promote the volatility of the real rates on financial assets.
Creation-Date: September 1990
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