The Signaling Effects of Fiscal Announcements

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. We construct a novel dataset that combines daily
data on Japanese stock prices with narrative records from press releases about a
set of extraordinary fiscal packages introduced by the Japanese government from
2011-2020. We use local projections to show that these fiscal stimuli were often
interpreted as negative news by the stock market whereas exogenous fiscal inter-
ventions 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 reac-
tions. In addition, these negative effects on stock prices arose more commonly when
fiscal stimuli were announced against a backdrop of heightened macroeconomic un-
certainty. Both findings are shown to be consistent with the theory of signaling
effects. Joint paper with Leonardo Melosi, Hiroshi Morita, and Anna Rogantini Picco.

Link to paper.

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