Do housing bubbles generate fiscal bubbles? Empirical evidence from Taiwan

Quantitative easing (QE) by three major economies, i.e. US, the European Monetary Union (EMU), and Japan, has circulated a large amount of money around the globe. While this policy measure has successfully helped the world economy weather the storm, it has also generated several side effects plaguing emerging markets as well as advanced economies. Among the various side effects brought about by QE, the housing bubble stands out as one of the worst economic issues as this phenomenon normally hinders young people from possessing their own accommodations. Another economic issue after the housing bubble is the emergence of expansionary fiscal policy associated with the rise of public expenditure and revenue as well. This causal relationship is particularly apparent at the local government level as property taxes tend to be the major income source for sub-national governments worldwide.

This paper attempts to examine the effects of the most recent housing bubble on the fiscal policy of Taiwan. This economy, as in every major economy, has experienced a remarkable housing bubble ever since 2009 when QE was initiated and in full swing. Therefore, we take the viewpoint that Taiwan is a good candidate for case study in this research. In this study, we employ Taiwan’s 22 jurisdictions for the time span from 2010 to 2017 of local governments (including city and county), fiscal data, and real estate prices, as the so-called panel data, for analysis. We use a panel data analysis with an instrumental variable model. We particularly use an instrumental variable approach that helps to isolate the fiscal consequences of housing price appreciation. The ultimate goal of this research is to identify influence of the housing bubble on local governments’ fiscal policy and further, to generate some policy implications for policy analysts to offset the downsides resulting from the housing bubbles.