A1010
Title: The signaling effects of fiscal announcements
Authors: Francesco Zanetti - University of Oxford (United Kingdom) [presenting]
Leonardo Melosi - Federal Reserve Bank of Chicago (United States)
Anna Rogantini Picco - Sveriges Riksbank (Sweden)
Hiroshi Morita - Institute of Science Tokyo (Japan)
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, it is shown 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. A method is introduced 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.
