125 ​Years of time-varying effects of fiscal policy on financial markets

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 20 th century, thus providing new insights into the dynamic role of fiscal policy.

Evolving United States stock market volatility: The role of conventional and unconventional monetary policies

“…The decrease of interest rates for the first and the second period is smaller in size for the model with changing coefficients, than the model with constant parameters. Moreover, a supply shock has a positive effect on stock volatility -a result in line with theory, i.e., higher economic activity leads to more trading and higher volatility (Marfatia et al, 2020). The bands of the shock are narrower for the first two In Figure 3, we depict the cumulative IRFs for a one standard deviation positive shock to SSR growth rates.…”

Sentiment Regimes and Reaction of Stock Markets to Conventional and Unconventional Monetary Policies: Evidence from OECD Countries

“…As part of future research, it would be interesting to extend our analysis to emerging equity markets and provide a comparative analysis. Moreover, with some studies having analyzed the impact of fiscal policy shocks on stock market in the wake of the ZLB (see Marfatia et al, (2020) for a detailed literature review), an extension of our work would be to investigate the impact of fiscal policy shocks contingent on levels of sentiment.…”

Impact of Fiscal Policy on Financial Development in Sub-Sahara Africa

“…Earlier studies have suggested that the development of these two sectors of the financial system each has a statistically significant effect on economic growth in emerging and developing economies such as SSA. (Marcelin and Mathur, 2016;Sepehrdoust & Shabkhaneh, 2018;Dumičić, 2019;Marfatia et al, 2020). Consistent with these findings, developing countries have tended to focusing on modernizing and liberalizing their financial systems to allow for greater private sector participation (Fowowe, 2013;Shijaku and Kalluci, 2013; .…”