TY - UNPB

T1 - Fiscal policy shocks and stock prices in the United States

AU - Mumtaz, Haroon

AU - Theodoridis, Konstantinos

PY - 2017/6

Y1 - 2017/6

N2 - This paper uses a range of structural VARs to show that the response of US stock prices to fiscal shocks changed in 1980. Over the period 1955-1980 an expansionary spending or revenue shock was associated with modestly higher stock prices. After 1980, along with a decline in the fiscal multiplier, the response of stock prices to the same shock became negative and largerin magnitude. We use an estimated DSGE model to show that this change is consistent with a switch from an economy characterised by active fiscal policy and passive monetary policy to one where fiscal policy was passive and the central bank acted aggressively in response to inflationary shocks.

AB - This paper uses a range of structural VARs to show that the response of US stock prices to fiscal shocks changed in 1980. Over the period 1955-1980 an expansionary spending or revenue shock was associated with modestly higher stock prices. After 1980, along with a decline in the fiscal multiplier, the response of stock prices to the same shock became negative and largerin magnitude. We use an estimated DSGE model to show that this change is consistent with a switch from an economy characterised by active fiscal policy and passive monetary policy to one where fiscal policy was passive and the central bank acted aggressively in response to inflationary shocks.

KW - Fiscal policy shocks

KW - Stock prices

KW - VAR

KW - DSGE

M3 - Working paper

T3 - Economics working paper series

BT - Fiscal policy shocks and stock prices in the United States

PB - Lancaster University, Department of Economics

ER -