Fiscal policy and stock markets at the effective lower bound

Christophe André, Petre Caraiani and Rangan Gupta

Finance Research Letters, 2023, vol. 58, issue PC

Abstract: We study the impact of fiscal policy at the effective lower bound (ELB) in the stocks markets of the Euro Area, by specifically looking at a government spending shock. To uncover the impact of this shock, we estimate a factor-augmented 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 significant 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; Zero lower bound; VAR; Stock market (search for similar items in EconPapers)
JEL-codes: C32 E52 E58 G12 (search for similar items in EconPapers)
Date: 2023
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Working Paper: Fiscal Policy and Stock Markets at the Effective Lower Bound (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:58:y:2023:i:pc:s1544612323009364

DOI: 10.1016/j.frl.2023.104564

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