US Fiscal Policy and Asset Prices: The Role of Partisan Conflict

Abstract

Fiscal policy shocks exert wide‐reaching effects, including movements in asset markets. US politics have been characterized historically by a high degree of partisan conflict. The combination of increasing polarization and divided government leads not only to significant Congressional gridlock, but also to spells of high fiscal policy uncertainty. This paper adds to the literature on the relationships between fiscal policy and asset prices in the US economy conditional on the degree of partisan conflict. We analyze whether a higher degree of partisan conflict (legislative gridlock) reduces the efficacy of the effect and response of fiscal policy on and to asset price movements, respectively. We find that partisan conflict does not significantly affect the relationships between the fiscal surplus to gross domestic product (GDP) and housing and equity returns. Rather, if important, partisan conflict affects the actual implementation of fiscal policy actions.

125 ​Years of time-varying effects of fiscal policy on financial markets

“…This is particularly true in the pre-1950s. This corroborates the existing evidence relating to stock markets (Tavares and Valkanov, 2001;Ardagna, 2009;Afonso and Sousa, 2011;Agnello and Sousa, 2013;Mumtaz and Theodoridis, 2017;Gupta et al, 2018;and El Montasser et al, forthcoming). For most of the post-1950s, the coefficient of the fiscal policy's effect on stock and bond returns is negative.…”

“…Simo-Kengne et al (2016) provide a detailed literature review. The emergence of the zero lower bound of the Federal funds rate in the aftermath of the Great Recession precipitated a recent literature that analyzes the effect of fiscal policy on stock markets (Afonso and Sousa, 2011;Agnello and Sousa, 2013;Chatziantoniou et al, 2013;Mumtaz and Theodoridis, 2017;Gupta et al, 2018;El Montasser et al, forthcoming) and bond markets (Tavares and Valkanov, 2001;Ardagna, 2009;Li et.al., 2018). In general, these papers show that expansionary fiscal policy positively affects stock and bond returns.…”

Corporate decision making in the presence of political uncertainty: The case of corporate cash holdings

“…These findings extend a growing literature examining the consequences of U.S. partisan conflict (see Azzimonti, ,b; Cheng, Hankins, & Chiu, ; Gupta, Lau, Miller, & Wohar, ; Gupta, Pierdzioch, Selmi, & Wohar, ). Some economists believe that the slow recovery from the Great Recession can be explained, in part, by a higher degree of uncertainty.…”

Macroeconomic Shocks and Changing Dynamics of the U.S. REITs Sector

“…Naturally, understanding what macroeconomic and financial shocks drives the real estate market is of paramount importance, especially for a policymaker aiming to avoid future catastrophic effects observed under the 'Great Recession'. While there exists a large number of studies that have analyzed the role of both conventional and unconventional (in the wake of the zero lower bound (ZLB) scenario) monetary policy [3][4][5][6][7][8], and more recently, fiscal policy shocks on real estate markets [9,10], and the feedback from it in shaping policy decisions, there is dearth of studies that have analyzed the role of aggregate demand, aggregate supply, and bond yield spread shocks on real estate markets. The only exception to this is the recent paper by Plakandaras et al [11], where the authors study the effect of macroeconomic shocks in the determination of house prices in the US and the UK by employing time-varying parameter vector autoregressive (TVP-VAR) models covering the historical annual periods of 1830 to 2016 and 1845 to 2016, respectively.…”