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The Signaling Effects of Fiscal Announcements

Author

Listed:
  • Melosi, Leonardo

    (University of Warwick, Federal Reserve Bank of Chicago and CEPR)

  • Morita, Hiroshi

    (Tokyo Institute of Technology)

  • Rogantini Picco, Anna

    (ECB, Sveriges Riksbank, and CEPR)

  • Zanetti, Francesco

    (University of Oxford and CEPR)

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

  • Melosi, Leonardo & Morita, Hiroshi & Rogantini Picco, Anna & Zanetti, Francesco, 2024. "The Signaling Effects of Fiscal Announcements," The Warwick Economics Research Paper Series (TWERPS) 1512, University of Warwick, Department of Economics.
    • Handle: RePEc:wrk:warwec:1512
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    References listed on IDEAS

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    More about this item

    Keywords

    fiscal policy ; macroeconomic stabilization ; macroeconomic uncertainty ; stock prices ; Japan ; asymmetric information JEL Codes: E62 ; E32 ; D83;
    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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