Fiscal Policies and the Stock Market: International Dimensions

Fiscal Policies and the Stock Market : International Dimensions

Seminar Paper / Institute for International Economic Studies, Stockholm University,0347-8769 ;408

Published in connection with a visit at the IIES.
The dynamic effects of fiscal policies on the real equilibrium have been the subject of a large body of recent research, emphasizing the intertemporal dimensions of tax and spending policies both in closed and open-economy contexts. The analysis in this paper extends the intertemporal analysis which was conducted under full certainty to uncertain environments. The paper uses a two-country stochastic general-equilibrium model of the world economy to address issues concerning the effects of government tax and spending policies on private sector consumption asset portfolios and stock market valuations. The ket result of the paper us that the consequences of expected future policies and the characteristics of the international transmission depent on a transfer-problem criterion involving the government and the private-sector marginal propensities to spend in different states. General conditions for government-finance neutrality under uncertainty are derived. The paper shows that the effects of current spending policies on consumption savings and stock market prices conform to the predictions of the corresponding certainty intertemporal model.

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