U.S. Fiscal Policy and Asset Prices: The Role of Partisan Conflict
International Review of Finance, Forthcoming
19 Pages Posted: 19 Jun 2017 Last revised: 26 May 2018
Date Written: June 17, 2017
Fiscal policy shocks exert wide-reaching effects, including movements in asset markets. U.S. politics have been characterized historically by a high degree of partisan conflict. The combination of increasing polarization and divided government leads not only to significant Congressional gridlock, but also to spells of high fiscal policy uncertainty. This paper adds to the literature on the relationships between fiscal policy and asset prices in the U.S. economy, conditional on the degree of partisan conflict. We analyze whether a higher degree of partisan conflict (legislative gridlock) reduces the efficacy of the effect and response of fiscal policy on and to asset price movements, respectively. We find that partisan conflict does not significantly affect the relationships between the fiscal surplus to GDP and housing and equity returns. Rather, if important, partisan conflict affects the actual implementation of fiscal policy actions.
Keywords: Quantile structural VAR, fiscal policy, stock prices, house prices, partisan conflict
JEL Classification: , E62, G10, H30, R30
Suggested Citation: Suggested Citation