Taxes, Spending, and Market Returns

46 Pages Posted: 12 Sep 2014 Last revised: 15 Dec 2017

See all articles by Anthony M. Diercks

Anthony M. Diercks

Board of Governors of the Federal Reserve System: Monetary and Financial Market Analysis

William Waller

Tulane University - Finance & Economics

Multiple version iconThere are 4 versions of this paper

Date Written: September 12, 2014

Abstract

How fiscal policy impacts equity and bond returns is an open question. Unlike previous studies, we address this issue in a way that decomposes current returns into news about cash flows and news about discount rates. Moreover, we use narrative methods to identify plausibly exogenous shocks to fiscal policy. Our main findings suggest that tax increases lead to lower cash flow news and lower discount rates. However, the discount rate news dominates so that higher taxes are associated with higher equity returns. We confirm these results with simulations from a standard New Keynesian DSGE model.

Keywords: fiscal policy, stock market, news decomposition

JEL Classification: G00, G10, G12, E00, E12, E60, E62

Suggested Citation

Diercks, Anthony M. and Waller, William, Taxes, Spending, and Market Returns (September 12, 2014). Available at SSRN: https://ssrn.com/abstract=2495257 or http://dx.doi.org/10.2139/ssrn.2495257

Anthony M. Diercks (Contact Author)

Board of Governors of the Federal Reserve System: Monetary and Financial Market Analysis ( email )

20th and C Streets, NW
Washington, DC 20551
United States

William Waller

Tulane University - Finance & Economics ( email )

A.B. Freeman School of Business
7 McAlister Drive
New Orleans, LA 70118
United States

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