Fiscal Policy Shocks and Stock Prices in the United State

Haroon Mumtaz and Konstantinos Theodoridis

No E2018/20, Cardiff Economics Working Papers from Cardiff University, Cardiff Business School, Economics Section

Abstract: This paper uses a range of structural VARs 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 modestly higher stock prices. After 1980, along with a decline in the fiscal multiplier, the response of stock prices to the same shock became negative. We use an estimated DSGE model to show that this change is consistent with a switch from an economy characterised by a more active fiscal policy and passive monetary policy to one where fiscal policy was passive and the central bank acted aggressively in response to inflationary shocks.

Keywords: Fiscal policy shocks; Stock prices; VAR; DSGE. (search for similar items in EconPapers)
JEL-codes: C5 E1 E5 E6 (search for similar items in EconPapers)
Pages: 68 pages
Date: 2018-08
New Economics Papers: this item is included in nep-dge, nep-his and nep-mac
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Related works:
Working Paper: Fiscal policy shocks and stock prices in the United States (2021)
Journal Article: Fiscal policy shocks and stock prices in the United States (2020)
Working Paper: Fiscal policy shocks and stock prices in the United States (2017)
Working Paper: Fiscal Policy Shocks and Stock Prices in the United States (2017)
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