The signaling effects of fiscal announcements

Working paper

Announcing a large fiscal stimulus may signal the government’s pessimism about the severity of a recession to the private sector, impairing the stabilizing effects of the policy. Using a theoretical model, we show that these signaling effects occur when the stimulus exceeds expectations and are more noticeable during periods of high economic uncertainty. Analysis of a new dataset of daily stock prices and fiscal news in Japan supports these predictions. We introduce a method to identify fiscal news with different degrees of signaling effects and find that such effects weaken or, in extreme cases, even completely undermine the stabilizing impact of fiscal policy.

Authors: Melosi, L; Morita, H; Rogantini Picco, A; Zanetti, F

• Publication status: Published
• Publisher: University of Oxford
• Series: Department of Economics Discussion Paper Series
• Publication date: 2024-08-27
• ISSN: 1471-0498
• Paper number: 1053
• Language: English
• Keywords: macroeconomic stabilization; macroeconomic uncertainty; Japan; asymmetric information; fiscal policy; stock prices