125 Years of Time-Varying Effects of Fiscal Policy on Financial Markets

27 Pages Posted: 4 Sep 2020

See all articles by Hardik Marfatia

Hardik Marfatia

Northeastern Illinois University - Economics

Rangan Gupta

University of Pretoria - Department of Economics

Stephen M. Miller

University of Nevada, Las Vegas - Department of Economics; University of Connecticut - Department of Economics

Date Written: January 21, 2020

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

Keywords: Fiscal Policy, Time-Varying impact, Financial returns and risks

JEL Classification: E5, C32, G14

Suggested Citation

Marfatia, Hardik and Gupta, Rangan and Miller, Stephen M., 125 Years of Time-Varying Effects of Fiscal Policy on Financial Markets (January 21, 2020). Available at SSRN: https://ssrn.com/abstract=3660937 or http://dx.doi.org/10.2139/ssrn.3660937

Hardik Marfatia

Northeastern Illinois University - Economics ( email )

5500 N. St. Louis
Chicago, IL 60625
United States

Rangan Gupta

University of Pretoria - Department of Economics ( email )

South Africa

Stephen M. Miller (Contact Author)

University of Nevada, Las Vegas - Department of Economics ( email )

4505 S. Maryland Parkway
Box 456005
Las Vegas, NV 89154
United States
702-895-3776 (Phone)
702-895-1354 (Fax)

HOME PAGE: http://faculty.unlv.edu/smiller/

University of Connecticut - Department of Economics

365 Fairfield Way, U-1063
Storrs, CT 06269-1063
United States

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