Dynamics between stock market movements and fiscal policy: Empirical evidence from emerging Asian economies

• Published in: Pacific-Basin finance journal Vol. 51; pp. 65 - 74
• Main Authors: BUI, Duy-Tung, LLORCA, Matthieu, BUI, Thi Mai Hoai
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01-10-2018
• Subjects: Emerging markets; Financial market; Fiscal policy; PVAR; Stock market; Fiscal policy; PVAR; Financial market; Stock market; Emerging markets
• ISSN: 0927-538X; 1879-0585
• DOI: 10.1016/j.pacfin.2018.05.010

Pro-cyclical fiscal policy has raised concern in many emerging economies due to its adverse consequences to the economic activities. This paper takes a different approach to the issue, which aims to examine the bidirectional relationships between fiscal policy and stock market activities, using a panel of 12 emerging Asia-Pacific economies from 1990 to 2015. We estimate a variety of Panel Vector Autoregressive models to test for the consistence of the results. The empirical results show that fiscal policies in these countries tend to a pro-cyclical path in responding to stock market movements. The pro-cyclical behavior is found with both government expenditure and government revenue. On the other hand, a fiscal consolidation attempt has a rewarding effect on stock prices.
•Confirm the bidirectional relationship between stock return and fiscal policy•Pro-cyclical fiscal policy with respect to stock market movements•Both government expenditure and government revenue are pro-cyclical.•A fiscal consolidation attempt has a rewarding effect on stock prices.