The time-series linkages between US fiscal policy and asset prices

Ghassen El Montasser, Rangan Gupta, Charl Jooste and Stephen Miller

No 2016-15, Working papers from University of Connecticut, Department of Economics

Abstract: This paper studies the interplay of fiscal policy and asset price returns of the United States in a time-varying-parameter vector autoregressive model. Using annual data from 1890 to 2013, we study the effects of dynamic shocks to both fiscal policy and asset returns on asset returns and fiscal policy. Distinguishing between low volatility (bull market) and high volatility (bear market) regimes together with a time-varying-parameter vector autoregressive model enables us to isolate the different size and sign of responses to shocks during different time periods. The results indicate that increases in the primary deficit to GDP ratio decrease house returns over the entire sample and at each impulse horizon. Unlike the house return response, stock returns only decrease in the first year after the fiscal shock, but then increase for the following eight years. Furthermore, the findings show that asset return movements affect fiscal policy, whereby fiscal policy responds more to equity returns than to house returns. The response of fiscal policy to asset returns proves relatively stable and constant over time while controlling for and identifying various asset return regimes. Asset returns respond uniformly to fiscal policy shocks since the 1900's.

Keywords: TVP-VAR; countercyclical fiscal policy; stock prices; house prices (search for similar items in EconPapers)
JEL-codes: C11 C15 C32 H30 H61 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2016-09
New Economics Papers: this item is included in nep-ure
Note: Stephen Miller is the corresponding author
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: The Time-series Linkages between US Fiscal Policy and Asset Prices (2020)
Working Paper: The Time-Series Linkages between US Fiscal Policy and Asset Prices (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:uct:uconnp:2016-15

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