Fiscal policy shocks and stock prices in the United States

Haroon Mumtaz and Konstantinos Theodoridis

European Economic Review, 2020, vol. 129, issue C

Abstract: This paper uses 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 higher stock prices. After 1980 the response of stock prices to the same shock became negative. Using a 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 and 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: C5 E1 E5 E6 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Related works:
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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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:129:y:2020:i:c:s0014292120301926

DOI: 10.1016/j.euroecorev.2020.103562

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