Fiscal Policy and Asset Prices in a Dynamic Factor Model with Cointegrated Factors

Takumah, Wisdom (2023): Fiscal Policy and Asset Prices in a Dynamic Factor Model with Cointegrated Factors.

Abstract

This paper investigates the effects of fiscal policy on asset prices using structural dynamic factor model (SDFM) with cointegrated factors. In this paper I estimated the impulse response functions (IRFs) of stock price and house to government spending shocks using 207 quarterly variables about the U.S economy. I identify government spending shock using “named factor normalization” and “unit effect normalization”. The results of the IRFs shows that both stock price and house price responded positively to government spending shock and the effects were persistent. The results implies that fiscal policy leads to a boom in housing and stock markets. This paper highlighted the importance of allowing cointegration among factors within the SDFM framework.

• Item Type: MPRA Paper
• Language: English
• Keywords: Fiscal policy, government spending, asset prices, dynamic factor model, cointegration, impulse response, named factor normalization.
• Subjects: E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy; F - International Economics > F6 - Economic Impacts of Globalization > F62 - Macroeconomic Impacts; G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates; G - Financial Economics > G1 - General Financial Markets > G18 - Government Policy and Regulation

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