On the stock market reactions to fiscal policies

In this paper, a panel analysis is employed to investigate the effects of fiscal policies on stock market indexes in 11 members of the Eurozone. Many studies have focused on the effects of monetary policy on the stock market, whereas the number of contributions studying the effects of fiscal policy on the stock market is surprisingly limited. Therefore, we know little, if any, on the sign and stability of the stock market reaction to fiscal policies. Our results show that fiscal policies influence the stock market and that, following an increase (decrease) in public deficit, stock market indexes go down (up). Nevertheless, further analysis shows that the signs of the estimated stock market reactions are not constant over time and that they change according to the surrounding macroeconomic scenario.