Fiscal Policy and Stock Markets at the Effective Lower Bound

Christophe André, Petre Caraiani and Rangan Gupta

No 202309, Working Papers from University of Pretoria, Department of Economics

Abstract: We study the impact of fiscal policy at the effective lower bound (ELB) in the stocks markets of the Euro Area, specically looking at a government spending shock. To uncover the impact of this shock, we estimate a factoraugmented interacted panel vector-autoregressive (FAIPVAR) model. We find statistically different impacts of the government spending shock across the ELB and non-ELB periods, with relatively stronger positive impact on stock returns under the former. Conversely, the differences are not statistically signiffcant for the United States using a time series data-based FAIVAR. Our findings have important implications from the perspectives of both policymaking and investors.

Keywords: Fiscal policy; Effective lower bound; VAR; Stock Market (search for similar items in EconPapers)
JEL-codes: C32 E52 E58 G12 (search for similar items in EconPapers)
Pages: 17 pages
Date: 2023-05
New Economics Papers: this item is included in nep-des and nep-eec
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