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

Author

Listed:
  • Hardik A. Marfatia

    (Northeastern Illinois University)

  • Rangan Gupta

    (University of Pretoria)

  • Stephen M. Miller

    (University of Nevada, Las Vegas)

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 parameter 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.

Suggested Citation

  • Hardik A. Marfatia & Rangan Gupta & Stephen M. Miller, 2020. "125 Years of Time-Varying Effects of Fiscal Policy on Financial Markets," Working papers 2020-12, University of Connecticut, Department of Economics.
    • Handle: RePEc:uct:uconnp:2020-12
    Note: Stephen Miller is the corresponding author
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    References listed on IDEAS

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    Cited by:

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    2. Oguzhan Cepni & Rangan Gupta & Qiang Ji, 2023. "Sentiment Regimes and Reaction of Stock Markets to Conventional and Unconventional Monetary Policies: Evidence from OECD Countries," Journal of Behavioral Finance, Taylor & Francis Journals, vol. 24(3), pages 365-381, July.
    3. Hardik A. Marfatia & Christophe André & Rangan Gupta, 2022. "Predicting Housing Market Sentiment: The Role of Financial, Macroeconomic and Real Estate Uncertainties," Journal of Behavioral Finance, Taylor & Francis Journals, vol. 23(2), pages 189-209, May.
    4. Polyzos, Efstathios, 2022. "Examining the asymmetric impact of macroeconomic policy in the UAE: Evidence from quartile impulse responses and machine learning," The Journal of Economic Asymmetries, Elsevier, vol. 26(C).

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    More about this item

    Keywords

    Fiscal Policy; Time-Varying impact; Financial returns and risks;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • 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
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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