US Fiscal Policy and Asset Prices: The Role of Partisan Conflict

• Author: Stephen M. Miller,Chi Keung Marco Lau,Rangan Gupta,Mark E. Wohar
• Date: 01 December 2019
• Published date: 01 December 2019
• DOI: http://doi.org/10.1111/irfi.12188

US Fiscal Policy and Asset Prices:

The Role of Partisan Conflict*

RANGAN GUPTA

†

,CHI KEUNG MARCO LAU

‡

,STEPHEN M. MILLER

§

AND

MARK E. WOHAR

¶,k

†

Department of Economics, University of Pretoria, Pretoria, South Africa

‡

Department of Accountancy, Finance and Economics, Huddersfield Business School,

University of Huddersfield, Queensgate, Huddersfield, UK

§

Department of Economics, University of Nevada, Las Vegas, Las Vegas, NV

¶

College of Business Administration, University of Nebraska at Omaha, Omaha,

NE and

k

School of Business and Economics, Loughborough University, Leicestershire, UK

ABSTRACT

Fiscal policy shocks exert wide-reaching effects, including movements in

asset markets. US politics have been characterized historically by a high

degree of partisan conflict. The combination of increasing polarization and

divided government leads not only to significant Congressional gridlock, but

also to spells of high fiscal policy uncertainty. This paper adds to the litera-

ture on the relationships between fiscal policy and asset prices in the US

economy conditional on the degree of partisan conflict. We analyze whether

a higher degree of partisan conflict (legislative gridlock) reduces the efficacy

of the effect and response of fiscal policy on and to asset price movements,

respectively. We find that partisan conflict does not significantly affect the

relationships between the fiscal surplus to gross domestic product (GDP) and

housing and equity returns. Rather, if important, partisan conflict affects the

actual implementation of fiscal policy actions.

JEL Codes: C32; E62; G10; H30; R30

Accepted: 22 February 2018

I. INTRODUCTION

Fiscal policy shocks exert wide-reaching effects, including movements in asset

markets (e.g., Blanchard and Perotti 2002; Mountford and Uhlig 2009; Ramey

2011a, 2011b; Ellahie and Ricco 2017; Mertens and Ravn 2014; Ricco 2015;

Linnemann and Winkler 2016). These studies concur that fiscal policy does

exert significant effects on the real economy, but the fiscal multiplier fell in

magnitude after 1980.

* We would like to thank an anonymous referee for many helpful comments. Any remaining

errors, however, are solely ours.

© 2018 International Review of Finance Ltd. 2018

International Review of Finance, 19:4, 2019: pp. 851–862

DOI: 10.1111/irfi.12188