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The Signaling Effects of Fiscal Announcements

Author

Listed:
  • Leonardo Melosi
  • Hiroshi Morita
  • Anna Rogantini Picco
  • Francesco Zanetti

Abstract

Announcing a large fiscal stimulus may signal the government’s pessimism about the severity of a recession to the private sector, impairing the stabilizing effects of the policy. Using a theoretical model, we show that these signaling effects occur when the stimulus exceeds expectations and are more noticeable during periods of high economic uncertainty. Analysis of a new dataset of daily stock prices and fiscal news in Japan supports these predictions. We introduce a method to identify fiscal news with different degrees of signaling effects and find that such effects weaken or, in extreme cases, even completely undermine the stabilizing impact of fiscal policy.

Suggested Citation

  • Leonardo Melosi & Hiroshi Morita & Anna Rogantini Picco & Francesco Zanetti, 2024. "The Signaling Effects of Fiscal Announcements," CAMA Working Papers 2024-55, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    • Handle: RePEc:een:camaaa:2024-55
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    File URL: https://cama.crawford.anu.edu.au/sites/default/files/publication/cama_crawford_anu_edu_au/2024-09/55_2024_melosi_morita_rogantinipicco_zanetti.pdf
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    Keywords

    fiscal policy; macroeconomic stabilization; macroeconomic uncertainty; stock prices; Japan; asymmetric information;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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