Fiscal Deficits and Stock Prices in India: Empirical Evidence

Abstract

Abstract:The study aims at examining how fiscal deficits affect the performance of the stock market in India by using annual data from 1988-2012. The study makes use of Ng-Perron unit root tests to check the non-stationarity property of the series; the Auto Regressive Distributed Lag (ARDL) bounds test and a Vector Error Correction Model (VECM) for testing both short and long run dynamic relationships. The variance decomposition (VDC) is used to predict the exogenous shocks of the variables. The findings of the bounds test reveal that the estimated equation and the series are co-integrated. The ARDL results suggest a long run negative relationship exists between budget deficit and stock prices and do not show any significant relationship in the short run. The VECM result shows that fiscal deficits influence the stock price only in the short run. The results of the Variance Decomposition show that stock price movement in the long run is mostly explained by shocks of fiscal deficits. The study implies that the government must adopt appropriate macroeconomic policies to reduce budget deficit, which will result in stock market growth and in turn will lead to the financial development of the country.

Impact of Macroeconomic and Demographic Variables on the Stock Market: Evidence from Tunisian Crisis

“…This result supports previous finding of (Greenspan & Allen, 1995;Ball & Mankiw, 1995;Quayes, 2010, Joshi & Kumar, 2015, who investigated a negative relationship between budget deficit and stock market.…”

“…By employing Auto Regressive Distributed Lag (ARDL) approach and Vector Error Correction Model (VECM) on annual data from 1988 to 2012, Joshi and Kumar (2015), studied both the long-run and the short-run relationship between Indian stock prices and budget deficit. The ARDL results show that budget deficit influences negatively stock price only in the long-run.…”

Determinants of Budget Deficit in Nigeria

“…This result contradicts the work of Al-Quada and Jaradat (2018) and Neaime (2015). The log of stock price is negative but not significant, which is consistent with the result of Joshi and Giri (2015). The log of interest rate is positive and statistically significant at 1% level.…”

“…The empirical findings point to unsustainable debt and exchange rate policies, suggesting that increasing fiscal deficits have begun to exacerbate current account deficits and the national public debt. Joshi and Giri (2015) examines how fiscal deficits affect the performance of the stock market in India, using annual data from 1988 to 2012. The long run results indicate a negative but insignificant relationship between budget deficit and stock prices while fiscal deficits influence the stock price in the short run.…”