Fiscal policy shocks and stock prices in the United States

Haroon Mumtaz and Konstantinos Theodoridis
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Haroon Mumtaz: Queen Mary University

Working Papers from European Stability Mechanism

Abstract: 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.

Keywords: Fiscal policy shocks; Stock prices; VAR; FAVAR; DSGE (search for similar items in EconPapers)
JEL-codes: C11 E24 E32 J64 (search for similar items in EconPapers)
Pages: 33
Date: 2021-05-17
New Economics Papers: this item is included in nep-dge, nep-fdg, nep-his, nep-mac and nep-ore
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Related works:
Journal Article: Fiscal policy shocks and stock prices in the United States (2020)
Working Paper: Fiscal Policy Shocks and Stock Prices in the United State (2018)
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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