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Dynamics between stock market movements and fiscal policy: Empirical evidence from emerging Asian economies

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  • BUI, Duy-Tung
  • LLORCA, Matthieu
  • BUI, Thi Mai Hoai

Abstract

Pro-cyclical fiscal policy has raised concern in many emerging economies due to its adverse consequences to the economic activities. This paper takes a different approach to the issue, which aims to examine the bidirectional relationships between fiscal policy and stock market activities, using a panel of 12 emerging Asia-Pacific economies from 1990 to 2015. We estimate a variety of Panel Vector Autoregressive models to test for the consistence of the results. The empirical results show that fiscal policies in these countries tend to a pro-cyclical path in responding to stock market movements. The pro-cyclical behavior is found with both government expenditure and government revenue. On the other hand, a fiscal consolidation attempt has a rewarding effect on stock prices.

Suggested Citation

  • BUI, Duy-Tung & LLORCA, Matthieu & BUI, Thi Mai Hoai, 2018. "Dynamics between stock market movements and fiscal policy: Empirical evidence from emerging Asian economies," Pacific-Basin Finance Journal, Elsevier, vol. 51(C), pages 65-74.
    • Handle: RePEc:eee:pacfin:v:51:y:2018:i:c:p:65-74
    DOI: 10.1016/j.pacfin.2018.05.010
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