Stephen M. Miller (Center for Business and Economic Research) published a paper, "The Time-series Linkages between US Fiscal Policy and Asset Prices," along with co-authors Ghassen El Montasser of the Campus Universitaire de la Manouba, Tunisia; Rangan Gupta of the University of Pretoria, South Africa; and Jooste Charl of the World Bank in Public Finance Review. This article studies the interplay of fiscal policy and asset price returns of the United States in a time-varying parameter vector autoregressive (VAR) model, using annual data from 1890 to 2013. They study the effects of dynamic shocks to both fiscal policy on asset returns and asset returns on fiscal policy. Distinguishing between low-volatility (bull market) and high-volatility (bear market) regimes together with a time-varying parameter VAR model enables them to isolate the different sizes and signs of responses to shocks during different time periods. The results indicate that increases in the primary surplus-to-gross-domestic-product ratio decrease house returns over the entire sample and at each impulse horizon. Unlike the house return responses, stock returns only decrease in the first year after the fiscal shock but then increase for the following eight years.
