Title: The signalling effects of fiscal announcements: Results from supplementary fiscal stimuli
Authors: Hiroshi Morita - Hosei University (Japan) [presenting]
Leonardo Melosi - Federal Reserve Bank of Chicago (United States)
Francesco Zanetti - Bank of England (United Kingdom)
Abstract: Announcements of fiscal stimulus packages may signal a contractionary view of the government on the future developments in the economy, but the identification of these effects is hindered by the inherent political nature and the large implementation lags of fiscal policy. The supplementary stimulus packages enacted by the Prime Minister Office of Japan over the period 2011-2020 provide an unprecedented set of fiscal stimuli to study the signalling effects of fiscal policy. We show that while fiscal announcements have the standard positive impact on stock prices, the signaling effect of fiscal policy generates a contraction in stock prices when stock market volatility is above the historical average. We develop a simple model of imperfect information that unravels the primary channels of influence for the signalling effects of fiscal announcements. We show that the confidence of agents, the precision of information received by the government and the systematic response of fiscal policy play a chief role in the signalling effects of fiscal policy. The signalling effects of fiscal announcements are contractionary on stock prices when confidence is low, but they turn expansionary when confidence is sufficiently high, and these effects are weakened by the degree of cyclicality in the systematic response of fiscal policy.