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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/27160
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| Title: | The Simple Analytics of Assets' Values and Infrequent Policy Changes |
| Authors: | Balduzzi, Pierluigi
Corsetti, Giancarlo
Foresi, Silverio |
| Keywords: | fiscal retrenchments
government spending
policy regime
stock prices
term structure of interst rates
trigger point |
| Issue Date: | Aug-1994 |
| Series/Report no.: | FIN-94-010 |
| Abstract: | This paper studies the effects on financial markets of an anticipated
fiscal stabilization policy in a stochastic environment. Stabilization
is defined as a discrete change in the budget process which is
implemented when government consumption reaches some threshold level,
known by economic agents. Our analysis integrates the study of financial
markets within the framework adopted by Bertola and Drazen (1993) to
explain the effects of private consumption of an anticipated fiscal
retrenchment, such as the fiscal reform implemented in Denmark in 1983.
The actual behavior of Danish financial markets points in the direction
of two interesting features of the policy change. First, in a model
intertemporal consumption smoothing, one can replicate the observed boom
in the stock market only with expectations of an increase in net income
to stock-holders. The term-structure evidence on the other hand, is
consistent with less than full credibility of the retrenchment, that is
with investors attaching some probability to a further expansion of the
government sector. |
| URI: | http://hdl.handle.net/2451/27160 |
| Appears in Collections: | Finance Working Papers
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