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Stock Market Response to Public Investment under the Zero Lower Bound: Cross-industry Evidence from Japan

Author

Listed:
  • Tomomi Miyazaki

    (Graduate School of Economics, Kobe University)

  • Kazuki Hiraga

    (School of Political Science and Economics, Tokai University)

  • Masafumi Kozuka

    (University of Marketing and Distribution Sciences (Japan))

Abstract

This research examines the effects of public investment on stock returns using Japanese cross-industry data. We calculate impulse response functions using the local projection method. The empirical results show that public investment shocks have strong and stimulating effects on stock returns when the nominal interest rate is at the zero lower bound (ZLB) while negative responses dominate outside of the ZLB period. Furthermore, the estimated impulse responses for the non-manufacturing industry group are larger than those of the manufacturing industry group. Our results imply that the government should increase public investment when nominal interest rates are near zero to prop up the stock market and cut back once the economy is no longer in a liquidity trap.

Suggested Citation

  • Tomomi Miyazaki & Kazuki Hiraga & Masafumi Kozuka, 2018. "Stock Market Response to Public Investment under the Zero Lower Bound: Cross-industry Evidence from Japan," Working Papers 171806, University of California-Irvine, Department of Economics.
    • Handle: RePEc:irv:wpaper:171806
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    References listed on IDEAS

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    Cited by:

    1. Tomomi Miyazaki & Haruo Kondoh, 2022. "Effects of Monetary and Fiscal Policy Interactions on Regional Employment: Evidence from Japan," Discussion Papers 2206, Graduate School of Economics, Kobe University.
    2. Kanazawa, Nobuyuki, 2021. "Public investment multipliers: Evidence from stock returns of the road pavement industry in Japan," Journal of Economic Dynamics and Control, Elsevier, vol. 133(C).

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    More about this item

    Keywords

    Public investment; stock returns; local projection method; zero lower bound;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures

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