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U.S. Fiscal Policy and Asset Prices: The Role of Partisan Conflict

Rangan Gupta (), Chi Lau (), Stephen Miller () and Mark Wohar ()
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Chi Lau: Newcastle Business School, Northumbria University, Newcastle upon Tyne, UK

No 201742, Working Papers from University of Pretoria, Department of Economics

Abstract: Fiscal policy shocks exert wide-reaching effects, including movements in asset markets. U.S. politics have been characterized historically by a high degree of partisan conflict. The combination of increasing polarization and divided government leads not only to significant Congressional gridlock, but also to spells of high fiscal policy uncertainty. This paper adds to the literature on the relationships between fiscal policy and asset prices in the U.S. economy, conditional on the degree of partisan conflict. We analyze whether a higher degree of partisan conflict (legislative gridlock) reduces the efficacy of the effect and response of fiscal policy on and to asset price movements, respectively. We find that partisan conflict does not significantly affect the relationships between the fiscal surplus to GDP and housing and equity returns. Rather, if important, partisan conflict affects the actual implementation of fiscal policy actions.

Keywords: Quantile structural VAR; fiscal policy; stock prices; house prices; partisan conflict (search for similar items in EconPapers)
JEL-codes: C32 E62 G10 H30 R30 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac
Date: 2017-06
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