Does fiscal policy matter for stock-bond return correlation?

Erica X.N. Li, Tao Zha, Ji Zhang and Hao Zhou

Journal of Monetary Economics, 2022, vol. 128, issue C, 20-34

Abstract: Switching between monetary and fiscal regimes is incorporated in a general-equilibrium model to explain three stylized facts: (1) a positive correlation of stock and bond returns in 1971–2001 and a negative correlation after 2001, (2) a negative correlation of consumption and inflation in 1971–2001 and a positive correlation after 2001, and (3) the coexistence of a positive bond risk premium and a negative correlation of stock and bond returns. While the technology shock drives the positive stock-bond and negative consumption-inflation correlations in the monetary regime, the investment shock drives the negative stock-bond and positive consumption-inflation correlations in the fiscal regime.

Keywords: Stock-bond return correlation; Consumption-inflation correlation; Fiscal regime; Technology shock; Investment shock (search for similar items in EconPapers)
JEL-codes: E52 E62 G12 G18 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0304393222000289
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Does Fiscal Policy Matter for Stock-Bond Return Correlation? (2020)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:128:y:2022:i:c:p:20-34

DOI: 10.1016/j.jmoneco.2022.03.003

Access Statistics for this article

Journal of Monetary Economics is currently edited by R. G. King and C. I. Plosser

More articles in Journal of Monetary Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().