Does Fiscal Policy Matter for Stock-Bond Return Correlation?

Xuenan Li, Tao Zha, Ji Zhang and Hao Zhou

No 27861, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We explore an important role of monetary-fiscal policy interactions in explaining three stylized facts: (1) a positive correlation of stock and bond returns in 1971-2001 and a negative one after 2001, (2) a negative correlation of consumption and inflation in 1971-2001 and a positive one after 2001, and (3) the coexistence of a positive bond risk premium and a negative correlation of stock and bond returns. Our general equilibrium model shows that these correlation changes across two policy regimes are driven by a combination of technology and investment shocks, while positive risk premiums are driven by the technology shock only.

JEL-codes: E52 E62 G12 G18 (search for similar items in EconPapers)
Date: 2020-09
New Economics Papers: this item is included in nep-cba, nep-fmk and nep-mac
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Published as Erica X.N. Li & Tao Zha & Ji Zhang & Hao Zhou, 2022. "Does Fiscal Policy Matter for Stock-Bond Return Correlation?," Journal of Monetary Economics, .

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