Fiscal Policy, Asset Prices, and Economic Sentiment

Ufuk Can ()

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: This paper examines how expansionary fiscal policy shapes asset prices and economic sentiment in the United States. I estimate a daily heteroskedastic VAR within a Bayesian framework, in which fiscal shocks, capturing changes in government spending and tax policy, are identified through shifts in volatility. The model includes stock prices, implied volatility, a text-based daily economic sentiment index, the one-year Treasury yield, and the corporate bond spread. The empirical findings show that expansionary fiscal shocks generate a persistent increase in equity valuations, a pronounced decline in implied volatility and uncertainty, and a sustained improvement in news-based economic sentiment. Corporate credit spreads narrow, signaling easier external financing conditions, while short-term yields rise, consistent with expectations of subsequent monetary tightening. These results point to a clear risk-on response driven by risk-premium and confidence channels. Fiscal actions quickly reprice risk and credit conditions, offering valuable guidance for policymakers, investors, and portfolio managers assessing the macro-financial effects of discretionary fiscal measures. By combining high-frequency fiscal identification with both market-based and text-based indicators, the paper provides a more nuanced perspective on the transmission of fiscal policy to financial markets.

Keywords: fiscal policy; asset prices; economic sentiment; uncertainty; Bayesian VAR (search for similar items in EconPapers)
JEL-codes: C22 E62 G12 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2026-04
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https://crawford.anu.edu.au/sites/default/files/2026-04/27_2026_Can.pdf (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2026-27

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