Submitted October 2009.
Dynamic Linkages among Budget Deficits, Interest Rates and the Stock Market*
Version of Record online: 6 DEC 2012
© 2012 The Author Fiscal Studies © 2012 Institute for Fiscal Studies
Volume 33, Issue 4, pages 547–570, December 2012
How to Cite
Laopodis, N. T. (2012), Dynamic Linkages among Budget Deficits, Interest Rates and the Stock Market. Fiscal Studies, 33: 547–570. doi: 10.1111/j.1475-5890.2012.00172.x
The author is grateful to the journal's Editor, Gareth Myles, and an anonymous referee for several constructive comments on the paper. He also wishes to thank Judith Payne for her excellent editorial assistance, which improved the flow of the paper. The usual disclaimer applies.
- Issue online: 6 DEC 2012
- Version of Record online: 6 DEC 2012
- budget deficit;
- stock market;
- monetary policy;
- vector autoregression (VAR);
- Ricardian Equivalence Proposition
This paper examines the dynamic linkages among the federal budget deficit, interest rates and the stock market for the United States from 1960 to 2006. The empirical strategy includes vector autoregression (VAR) and Granger causality analyses. The results suggest that budget deficits negatively impact upon stock returns, which implies a violation of the Ricardian Equivalence Proposition. Further analysis shows a higher sensitivity of stock returns to corporate taxes than to public spending. Finally, it is shown that although taxes are relevant for corporate profits in the short run, budget deficits are important for the stock market in the long run.