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

Document Type

Article

Publication Date

3-14-2018

Publication Title

International Review of Finance

Volume

19

Issue

4

First page number:

851

Last page number:

862

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.

Keywords

Fiscal policy; Asset markets; Polarization; Partisan conflict

Disciplines

Economics | Social and Behavioral Sciences

Language

English

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