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The Signaling Effects of Fiscal Announcements

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Abstract

Fiscal announcements may transfer information about the government’s view of the macroeconomic outlook to the private sector, diminishing the effectiveness of fiscal policy as a stabilization tool. We construct a novel dataset that combines daily data on Japanese stock prices with narrative records from press releases about a set of extraordinary fiscal packages introduced by the Japanese government from 2011-2020. We use local projections to show that these fiscal stimuli were often interpreted as negative news by the stock market whereas exogenous fiscal interventions that do not convey any information about the business cycle (e.g., the successful bids to host the Olympics on September 8, 2013) fostered bullish reactions. In addition, these negative effects on stock prices arose more commonly when fiscal stimuli were announced against a backdrop of heightened macroeconomic uncertainty. Both findings are shown to be consistent with the theory of signaling effects.

Suggested Citation

  • Leonardo Melosi & Francesco Zanetti, 2022. "The Signaling Effects of Fiscal Announcements," Working Paper Series WP 2022-38, Federal Reserve Bank of Chicago.
    • Handle: RePEc:fip:fedhwp:95172
    DOI: 10.21033/wp-2022-38
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    More about this item

    Keywords

    Fiscal stabilization policy; macroeconomic uncertainty; information; public expectations; Natural Experiments; Japan;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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