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.
Keywords:
JEL-Classification-Number:
Creation-Date: September 1990
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