Fiscal Policy and Asset Prices in a Dynamic Factor Model with Cointegrated Factors

Wisdom Takumah

MPRA Paper from University Library of Munich, Germany

Abstract: This paper investigates the effects of fiscal policy on asset prices using structural dynamic factor model (SDFM) with cointegrated factors. In this paper I estimated the impulse response functions (IRFs) of stock price and house to government spending shocks using 207 quarterly variables about the U.S economy. I identify government spending shock using “named factor normalization” and “unit effect normalization”. The results of the IRFs shows that both stock price and house price responded positively to government spending shock and the effects were persistent. The results implies that fiscal policy leads to a boom in housing and stock markets. This paper highlighted the importance of allowing cointegration among factors within the SDFM framework.

Keywords: Fiscal policy; government spending; asset prices; dynamic factor model; cointegration; impulse response; named factor normalization. (search for similar items in EconPapers)
JEL-codes: E62 F62 G12 G18 (search for similar items in EconPapers)
Date: 2023-06-30, Revised 2023-07-10
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:117897

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