Fiscal policy shocks and stock prices in the United States
Download PDF: Working Paper 48
This paper shows that fiscal policies seeking to stimulate long-run economic activity lead to higher stock prices
Authors: Haroon Mumtaz (Queen Mary University) and Konstantinos Theodoridis (ESM)
This paper uses structural vector autoregressive models (SVARs) to show that the response of US stock prices to fiscal shocks changed in 1980. Over the period 1955-1979, an expansionary spending or revenue shock was associated with higher stock prices. After 1980, the response of stock prices to the same shock became negative. Using a dynamic stochastic general equilibrium (DSGE) model with a detailed fiscal sector, we show the pre-1980 results may be driven by an expansion in supply after the fiscal shock. In contrast, endogenous growth mechanisms appear to be weaker in the post-1980 period with positive fiscal shocks pushing down consumption, total factor productivity (TFP), and causing inflation and the real interest rate to rise.
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Keywords: Fiscal policy shocks, Stock prices, VAR, FAVAR, DSGE
JEL codes: E24, E32, J64, C11