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Does fiscal policy matter for stock-bond return correlation?

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  • Li, Erica X.N.
  • Zha, Tao
  • Zhang, Ji
  • Zhou, Hao

Abstract

Switching between monetary and fiscal regimes is incorporated in a general-equilibrium model to explain three stylized facts: (1) a positive correlation of stock and bond returns in 1971–2001 and a negative correlation after 2001, (2) a negative correlation of consumption and inflation in 1971–2001 and a positive correlation after 2001, and (3) the coexistence of a positive bond risk premium and a negative correlation of stock and bond returns. While the technology shock drives the positive stock-bond and negative consumption-inflation correlations in the monetary regime, the investment shock drives the negative stock-bond and positive consumption-inflation correlations in the fiscal regime.

Suggested Citation

  • Li, Erica X.N. & Zha, Tao & Zhang, Ji & Zhou, Hao, 2022. "Does fiscal policy matter for stock-bond return correlation?," Journal of Monetary Economics, Elsevier, vol. 128(C), pages 20-34.
    • Handle: RePEc:eee:moneco:v:128:y:2022:i:c:p:20-34
    DOI: 10.1016/j.jmoneco.2022.03.003
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    More about this item

    Keywords

    Stock-bond return correlation; Consumption-inflation correlation; Fiscal regime; Technology shock; Investment shock;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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