Fiscal Insurance

Leslie Sheng Shen and Nancy Xu

No 21101, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We show that government policies interact in ways that shape how capital markets price risk. We introduce the concept of fiscal insurance: a mechanism through which certain fiscal tools are perceived by investors to mitigate the risks created by other government policies. Exploiting the 2018--19 U.S. tariff shocks and concurrent federal procurement spending, we find that firms facing higher tariff exposure earn higher risk premia, but this effect is substantially attenuated for firms receiving greater procurement. Procurement itself increases more for politically connected and economically vulnerable firms, revealing both political and economic channels of fiscal insurance. Overall, our evidence documents the existence of fiscal insurance, a cross-policy mechanism, with implications for firm valuation and real activity.

Keywords: Fiscal policy; Risk premia; Tariffs; Uncertainty; Procurement (search for similar items in EconPapers)
JEL-codes: E62 G12 G14 G38 (search for similar items in EconPapers)
Date: 2026-01
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