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The time-series linkages between US fiscal policy and asset prices

Author

Listed:
  • Ghassen El Montasser

    (Universitaire de la Manouba)

  • Rangan Gupta

    (University of Pretoria)

  • Charl Jooste

    (University of Pretoria)

  • Stephen M. Miller

    (University of Nevada, Las Vegas and University of Connecticut)

Abstract

This paper studies the interplay of fiscal policy and asset price returns of the United States in a time-varying-parameter vector autoregressive model. Using annual data from 1890 to 2013, we study the effects of dynamic shocks to both fiscal policy and asset returns on asset returns and fiscal policy. Distinguishing between low volatility (bull market) and high volatility (bear market) regimes together with a time-varying-parameter vector autoregressive model enables us to isolate the different size and sign of responses to shocks during different time periods. The results indicate that increases in the primary deficit to GDP ratio decrease house returns over the entire sample and at each impulse horizon. Unlike the house return response, stock returns only decrease in the first year after the fiscal shock, but then increase for the following eight years. Furthermore, the findings show that asset return movements affect fiscal policy, whereby fiscal policy responds more to equity returns than to house returns. The response of fiscal policy to asset returns proves relatively stable and constant over time while controlling for and identifying various asset return regimes. Asset returns respond uniformly to fiscal policy shocks since the 1900's.

Suggested Citation

  • Ghassen El Montasser & Rangan Gupta & Charl Jooste & Stephen M. Miller, 2016. "The time-series linkages between US fiscal policy and asset prices," Working papers 2016-15, University of Connecticut, Department of Economics.
  • Handle: RePEc:uct:uconnp:2016-15 Note: Stephen Miller is the corresponding author
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    References listed on IDEAS

    as
    1. 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.
    2. Rangan Gupta & Charl Jooste & Kanyane Matlou, 2014. "A time-varying approach to analysing fiscal policy and asset prices in South Africa," Journal of Financial Economic Policy, Emerald Group Publishing, vol. 6(1), pages 46-63, April.
    3. Luca Agnello & Ricardo M. Sousa, 2013. "Fiscal Policy And Asset Prices," Bulletin of Economic Research, Wiley Blackwell, pages 154-177.
    4. Goodness C. Aye & Mehmet Balcilar & Rangan Gupta & Charl Jooste & Stephen M. Miller & Zeynel Abidin Ozdemir, 2012. "Fiscal Policy Shocks and the Dynamics of Asset Prices: The South African Experience," Working papers 2012-27, University of Connecticut, Department of Economics.
    5. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-1072, June.
    6. Beatrice D. Simo-Kengne & Stephen M. Miller & Rangan Gupta, 2013. "Evolution of Monetary Policy in the US: The Role of Asset Prices," Working Papers 201343, University of Pretoria, Department of Economics.
    7. Perron, Pierre & Rodriguez, Gabriel, 2003. "GLS detrending, efficient unit root tests and structural change," Journal of Econometrics, Elsevier, pages 1-27.
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    9. Stock, James H & Watson, Mark W, 1996. "Evidence on Structural Instability in Macroeconomic Time Series Relations," Journal of Business & Economic Statistics, American Statistical Association, vol. 14(1), pages 11-30, January.
    10. 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.
    11. Giorgio E. Primiceri, 2005. "Time Varying Structural Vector Autoregressions and Monetary Policy," Review of Economic Studies, Oxford University Press, vol. 72(3), pages 821-852.
    12. Efthymios Pavlidis & Alisa Yusupova & Ivan Paya & David Peel & Enrique Martínez-García & Adrienne Mack & Valerie Grossman, 2016. "Episodes of Exuberance in Housing Markets: In Search of the Smoking Gun," The Journal of Real Estate Finance and Economics, Springer, vol. 53(4), pages 419-449, November.
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    Cited by:

    1. Rangan Gupta & Chi Keung Marco Lau & Stephen M. Miller & Mark E. Wohar, 2017. "U.S. Fiscal Policy and Asset Prices: The Role of Partisan Conflict," Working papers 2017-10, University of Connecticut, Department of Economics.
    2. Gabriela-Victoria Anghelache & Stela Jakova & Dumitru-Cristian Oanea, 2016. "Fiscal Policy and Capital Market Performance: Evidence from EU Countries from Central and Eastern Europe," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 6(2), pages 34-43, April.

    More about this item

    Keywords

    TVP-VAR; countercyclical fiscal policy; stock prices; house prices;

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • H61 - Public Economics - - National Budget, Deficit, and Debt - - - Budget; Budget Systems

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