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Fiscal Policy and Stock Markets at the Effective Lower Bound

Author

Listed:
  • Christophe Andre

    (OECD, 75775 Paris Cedex 16, France)

  • Petre Caraiani

    (Institute for Economic Forecasting, Romanian Academy, Romania; Bucharest University of Economic Studies, Bucharest, Romania)

  • Rangan Gupta

    (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa)

Abstract

We study the impact of fiscal policy at the effective lower bound (ELB) in the stocks markets of the Euro Area, specically looking at a government spending shock. To uncover the impact of this shock, we estimate a factoraugmented interacted panel vector-autoregressive (FAIPVAR) model. We find statistically different impacts of the government spending shock across the ELB and non-ELB periods, with relatively stronger positive impact on stock returns under the former. Conversely, the differences are not statistically signiffcant for the United States using a time series data-based FAIVAR. Our findings have important implications from the perspectives of both policymaking and investors.

Suggested Citation

  • Christophe Andre & Petre Caraiani & Rangan Gupta, 2023. "Fiscal Policy and Stock Markets at the Effective Lower Bound," Working Papers 202309, University of Pretoria, Department of Economics.
    • Handle: RePEc:pre:wpaper:202309
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Fiscal policy; Effective lower bound; VAR; Stock Market;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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