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Financial markets' behavior around episodes of large changes in the fiscal stance

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  • Ardagna, Silvia
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    Abstract

    Using a panel of OECD countries from 1960 to 2002, this paper shows that interest rates, particularly those of long-term government bonds, decrease when countries' fiscal position improves and increase around periods of budget deteriorations. Stock market prices surge around times of substantial fiscal tightening and plunge in periods of very loose fiscal policy. In addition, the paper shows that results depend on countries' initial fiscal conditions and on the type of fiscal consolidations: Fiscal adjustments that occur in country-years with high levels of government deficit, that are implemented by cutting government spending, and that generate a permanent and substantial decrease in government debt are associated with larger reductions in interest rates and increases in stock market prices.

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    File URL: http://www.sciencedirect.com/science/article/B6V64-4T5JJ0D-1/2/ee123e9091ffe7d8efceb8e3feabd66a
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    Bibliographic Info

    Article provided by Elsevier in its journal European Economic Review.

    Volume (Year): 53 (2009)
    Issue (Month): 1 (January)
    Pages: 37-55

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    Handle: RePEc:eee:eecrev:v:53:y:2009:i:1:p:37-55

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    Web page: http://www.elsevier.com/locate/eer

    Related research

    Keywords: Fiscal stabilizations Fiscal expansions Interest rates Stock market prices;

    References

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    Citations

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    Cited by:
    1. Weonho Yang & Jan Fidrmuc & Sugata Ghosh, 2013. "Macroeconomic Effects of Fiscal Adjustment: A Tale of two Approaches," CESifo Working Paper Series 4401, CESifo Group Munich.
    2. Afonso, António & Martins, Manuel M.F., 2012. "Level, slope, curvature of the sovereign yield curve, and fiscal behaviour," Journal of Banking & Finance, Elsevier, vol. 36(6), pages 1789-1807.
    3. Luca Agnello & Vitor Castro & Ricardo M. Sousa, 2011. "How Does Fiscal Policy React to Wealth Composition and Asset Prices?," GEMF Working Papers 2011-18, GEMF - Faculdade de Economia, Universidade de Coimbra.
    4. Fredj Jawadi & Sushanta K. Mallick & Ricardo M. Sousa, 2011. "Fiscal Policy in the BRICs," NIPE Working Papers 19/2011, NIPE - Universidade do Minho.
    5. Christoph A. Schaltegger & Martin Weder, 2010. "Fiscal Adjustment and the Costs of Public Debt Service: Evidence from OECD Countries," CREMA Working Paper Series 2010-08, Center for Research in Economics, Management and the Arts (CREMA).
    6. Muhammad Ali Nasir & Alaa M. Soliman, 2014. "Aspects of Macroeconomic Policy Combinations and Their Effects on Financial Markets," Economic Issues Journal Articles, Economic Issues, vol. 19(1), pages 95-118, March.
    7. Afonso, António & Sousa, Ricardo M., 2011. "What are the effects of fiscal policy on asset markets?," Economic Modelling, Elsevier, vol. 28(4), pages 1871-1890, July.
    8. Luca Agnello & Ricardo M. Sousa, 2011. "Can Fiscal Policy Stimulus Boost Economic Recovery?," Revue économique, Presses de Sciences-Po, vol. 62(6), pages 1045-1066.
    9. Afonso, António & Jalles, João Tovar, 2014. "Assessing fiscal episodes," Economic Modelling, Elsevier, vol. 37(C), pages 255-270.
    10. Luca Agnello & Davide Furceri & Ricardo Sousa, 2013. "Discretionary Government Consumption, Private Domestic Demand, and Crisis Episodes," Open Economies Review, Springer, vol. 24(1), pages 79-100, February.
    11. Luca Agnello & Gilles Dufrénot & Ricardo M. Sousa, 2012. "Adjusting the U.S. Fiscal Policy for Asset Prices: Evidence from a TVP-MS Framework," NIPE Working Papers 20/2012, NIPE - Universidade do Minho.

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