A0371
Title: The signaling effects of fiscal announcements
Authors: Anna Rogantini Picco - Sveriges Riksbank (Sweden) [presenting]
Leonardo Melosi - Federal Reserve Bank of Chicago (United States)
Francesco Zanetti - Bank of England (United Kingdom)
Hiroshi Morita - Tokyo Institute of Technology (Japan)
Abstract: Fiscal announcements may transfer information about the government's view of the macroeconomic outlook to the private sector, diminishing the effectiveness of fiscal policy as a stabilization tool. A simple model is developed that transparently outlines conditions and key properties of the signalling effect and guides the empirical tests, and it is shown that results hold in a standard micro-founded model. A novel dataset that combines daily data on Japanese stock prices is constructed with narrative records from press releases about a set of extraordinary fiscal packages introduced by the Japanese government from 2011-2020. These fiscal stimuli are shown that be often interpreted as negative news by the stock market, whereas exogenous fiscal interventions that do not convey any information about the business cycle (e.g., the successful bids to host the Olympics on September 8, 2013) fostered bullish reactions. In addition, these negative effects on stock prices arose more commonly when fiscal stimuli were announced against a backdrop of heightened macroeconomic uncertainty. Our empirical findings support the theory of signalling effects.
