The signaling effects of fiscal announcements

Melosi, Leonardo; Morita, Hiroshi; Rogantini Picco, Anna; Zanetti, Francesco

The signaling effects of fiscal announcements

Leonardo Melosi, Hiroshi Morita, Anna Rogantini Picco and Francesco Zanetti

No 19380, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Announcing a large fiscal stimulus may signal the government's pessimism about the severity of a recession to the private sector, impairing the stabilizing effects of the policy. Using a theoretical model, we show that these signaling effects occur when the stimulus exceeds expectations and are more noticeable during periods of high economic uncertainty. Analysis of a new dataset of daily stock prices and fiscal news in Japan supports these predictions. We introduce a method to identify fiscal news with different degrees of signaling effects and find that such effects weaken or, in extreme cases, even completely undermine the stabilizing impact of fiscal policy.

Keywords: Japan (search for similar items in EconPapers)
JEL-codes: D83 E32 E62 (search for similar items in EconPapers)
Date: 2024-08
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