The Time-Series Linkages between US Fiscal Policy and Asset Prices

Public Finance Review, May 2020

21 Pages Posted: 2 Apr 2015 Last revised: 27 Jul 2020

See all articles by Ghassen El Montasser

Ghassen El Montasser

University of Manouba

Rangan Gupta

University of Pretoria - Department of Economics

Charl Jooste

World Bank

Stephen M. Miller

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

Date Written: March 31, 2015

Abstract

This paper studies the interplay of fiscal policy and asset price returns of the United States in a time-varying-parameter vector autoregressive model. Using annual data from 1890 to 2013, we study the effects of dynamic shocks to both fiscal policy and asset returns on asset returns and fiscal policy. Distinguishing between low volatility (bull market) and high volatility (bear market) regimes together with a time-varying-parameter vector autoregressive model enables us to isolate the different size and sign of responses to shocks during different time periods. The results indicate that increases in the primary deficit to GDP ratio decrease house returns over the entire sample and at each impulse horizon. Unlike the house return response, stock returns only decrease in the first year after the fiscal shock, but then increase for the following eight years. Furthermore, the findings show that asset return movements affect fiscal policy, whereby fiscal policy responds more to equity returns than to house returns. The response of fiscal policy to asset returns proves relatively stable and constant over time while controlling for and identifying various asset return regimes. Asset returns respond uniformly to fiscal policy shocks since the 1900's.

Keywords: TVP-VAR, countercyclical fiscal policy, stock prices, house prices

JEL Classification: C11, C15, C32, H30, H61

Suggested Citation

El Montasser, Ghassen and Gupta, Rangan and Jooste, Charl and Miller, Stephen M., The Time-Series Linkages between US Fiscal Policy and Asset Prices (March 31, 2015). Public Finance Review, May 2020, Available at SSRN: https://ssrn.com/abstract=2587847 or http://dx.doi.org/10.2139/ssrn.2587847

Ghassen El Montasser

University of Manouba ( email )

Campus Universitaire de La Manouba
Manouba
Tunisia

Rangan Gupta

University of Pretoria - Department of Economics ( email )

Lynnwood Road
Hillcrest
Pretoria, 0002
South Africa

Charl Jooste

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

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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