And there were seven cows, fat and sleek coming out of the Nile … And then seven other cows came up, behind them, starved, very wretched and lean … The lean and wretched cows ate up the first seven fat cows. Genesis, 41.18-19
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International Monetary Fund and European Central Bank, respectively. The views expressed are solely our own and do not necessarily reflect those of our respective institutions. We thank Michael Deppler, Robert Flood, Eduardo Ley, Martin Mühleisen, Roberto Perotti, Axel Schimmelpfennig, participants of a seminar in the IMF’s Fiscal Affairs Department, where the second author was a visiting scholar during summer 2003, participants at the EU Commission’s research seminar, and the participants of an ECB seminar on fiscal and monetary policy challenges in boom-bust phases for valuable comments. We also thank Angelo Alexander and Sergei Antoshin for excellent research assistance.
Borio and Lowe (2002) and the May 2000 World Economic Outlook discuss possible mechanisms for generating boom-bust cycles in asset prices.
Asset price cycles have been found to contribute significantly to the deterioration in public finances in both industrialized and emerging market countries, especially when resulting in financial crises, see inter alia Honahon and Klingebiel (2003), Eschenbach and Schuknecht (2002b), Collyns and Kincaid (2003), and Manasse, Roubini, and Schimmelpfennig (2003). Hemming, Kell, and Schimmelpfennig (2003) find improving fiscal balances and rising public spending in prefinancial crises booms in a number of emerging market countries.
See Bordo and Jeanne (2003), the April 2003 World Economic Outlook, and Detken and Smets (2003) for other approaches to dating asset price booms and busts.
The data used in this paper cover 16 industrial countries including the seven major industrial countries, Australia, Belgium, Denmark, Finland, Ireland, the Netherlands, Spain, Sweden, and Switzerland. The series for Spain starts in 1971.
The details of the methodology for constructing the BIS’s aggregate asset price index is discussed in Borio, Kennedy, and Prowse (1994, Appendix I).
Zarnowitz’s (1985) cycle dating procedure uses, however, turning points in the level of the cyclical reference series, and the duration of contractions therefore tends to be shorter compared with dating procedures that use growth rates to pick cyclical turning points. It would be interesting to examine whether the asset price and growth patterns observed more recently imply a return to pre-1933 cyclical patterns.
For surveys on the behavior of fiscal policies in EU countries under the SGP framework, see Buti, Eijffinger and Franco (2003) and Fatas, von Hagen, Hughes Hallet, Sibert and Strauch (2003) and Briotti (2004).
See the detailed case studies underlying this data as conducted by Eschenbach and Schuknecht, 2002b.
See Jaeger (2003) for a discussion of the role of corporate balance sheet adjustments in explaining protracted slow growth in the euro area.
See Giammarioli and Schuknecht (2003) for analysis and examples. Of course, the design of fiscal measures is key so as to prevent moral hazard due to the expectation of some form of government bailout.