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125 Years of Time-Varying Effects of Fiscal Policy on Financial Markets

Hardik Marfatia, Rangan Gupta () and Stephen Miller ()

No 201956, Working Papers from University of Pretoria, Department of Economics

Abstract: This paper examines the effect of fiscal policy on financial markets over a long span of 125 years. Unlike existing studies that mainly focus on monetary policy shocks and model-based identification of fiscal policy shocks, we use a time-varying model to study the effect of fiscal policy with much cleaner and direct identification of fiscal policy shocks. In addition, we extend our analysis by measuring the response volatility in these markets and separately study the effects of good and bad components of volatility. We find significant time-variation in the response of stock and bond market returns and volatility. The overall response of the stock market exceeds that of bond markets, with more pronounced effects in the pre-1950 period than in the last six decades. Fiscal consolidation generates long-term benefits that positively affect financial markets in the latter part of the 20th century, thus providing new insights into the dynamic role of fiscal policy.

Keywords: Fiscal Policy; Time-Varying impact; Financial returns and risks (search for similar items in EconPapers)
JEL-codes: E5 C32 G14 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fmk, nep-his, nep-mac and nep-ore
Date: 2019-07
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