The Direct and Indirect Effects of Fiscal Policy on Stock Market in Developing Countries: A SVAR Model

Authors: 
Carlos Chavez
DOI Number: 
http://doi.org/10.31039/jomeino.2020.4.3.2
Abstract: 
This study estimate the effects of Fiscal Policy on Stock Market using a Structural Vector Autoregressive with short-terms restricctions for Peru and Mexico in 2003q2 – 2018q2 and 1998q1 – 2018q2 periods respectively and we add a dummy variable for control the finincial crisis period. The results show that Fiscal Policy have positive impact on Stock Market in both countries with directs and indirect effects. Fiscal Policy affects the Monetary Policy for Mexico. And Monetary Policy haven’t direct effects on stock market in both countries.
Keywords: 
Stock Market, Fiscal Policy, Monetary Policy, SVAR, Developing Countries.
Full Text: 
File download
References: 

Acuña, A. A., & Pinto, C. F. (2015). The Effect of Central Bank Policy Decisions on Stock Market Returns in Chile. Ecos de Economía, 48-65. doi:10.17230/ecos.2015.40.3

Afonso, A., & Sousa, R. M. (2011). What are the effects of fiscal policy on asset markets? Economic Modelling, 28(4), 1871-1890. doi:10.1016/j.econmod.2011.03.018

Agnello, L., & Sousa, R. M. (2011). Fiscal Policy and Asset Prices. Bulletin of Economic Research, 65(2), 154-177. doi:10.1111/j.0307-3378.2011.00420.x

Ake, B., & Ognaligui, R. W. (2010). Financial Stock Market and Economic Growth in Developing Countries: The Case of Douala Stock Exchange in Cameroon. International Journal of Business and Management, 5(5). doi:10.5539/ijbm.v5n5p82

Aksoy, Y., Basso, H & Martinez, J. (2011). Investment Cost Channel and Monetary Transmission, Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, 11(2), 1-13.

Allen, R., Hurcan, Y., & Queyranne, M. (2016). The Evolving Functions and Organization of Finance Ministries. Public Budgeting & Finance, 36(4), 3-25. doi:10.1111/pbaf.12141

Ananchotikul, S., & Eichengreen, B. (2008). Plumbing for Latin American capital markets. Press & Communications CH 4002 Basel, Switzerland, 110-139. in Settlements, Bank for International eds., New financing trends in Latin America: a bumpy road towards stability, vol. 36, Bank for International Settlements, https://EconPapers.repec.org/RePEc:bis:bisbpc:36-07.

Ang, J. B., & McKibbin, W. J. (2007). Financial liberalization, financial sector development and growth: Evidence from Malaysia. Journal of Development Economics, 84(1), 215–233. doi:10.1016/j.jdeveco.2006.11.006

Barro, R. J. (1987). Government spending, interest rates, prices, and budget deficits in the United Kingdom, 1701–1918. Journal of Monetary Economics, 20(2), 221–247. doi:10.1016/0304-3932(87)90015-8

BCRP (2018). Reporte de Estabilidad Financiera.

Bekaert, G., & Harvey, C. R. (1999). Capital flows and the behavior of emerging market equity returns. Fuqua School of Business Working Paper, (9807). Available at SSRN: https://ssrn.com/abstract=103120 or http://dx.doi.org/10.2139/ssrn.103120

Belke, A., Geisslreither, K, & Gros, D. (2004). On the relationship between Exchange rates and interest rates: Evidence from the southern cone. Cuadernos de economía, 41, 35-64.

Bernanke, B. & Kuttner, K. (2005). What Explains the Stock Market’s Reserve Reserva Policy?. The Journal Finance. 60(3), 1221-1257.

Bomfim, A.N. (2003). Pre-announcement effects, news effects and volatility: monetary policy and the stock market. Journal of Banking and Finance, 27(1), 133–151.

Borrallo, F., & Vallls, J. (2016). The Effects of US Unconventional Monetary Policies in Latin America (March 22, 2016). Banco de Espana Working Paper No. 1606, Available at SSRN: https://ssrn.com/abstract=2752888 or http://dx.doi.org/10.2139/ssrn.2752888

Bosworth, B. (2014). Interest Rates and Economic Growth: Are They Related? (May 1, 2014). Center for Retirement Research at Boston College Working Paper No. 2014-8, Available at SSRN: https://ssrn.com/abstract=2443845 or http://dx.doi.org/10.2139/ssrn.2443845

Cachanosky, N. (2015). U.S. monetary policy’s impact on Latin America’s structure of production (1960-2010). Latin American Journal of Economics, 52(2), 307–341. doi:10.7764/laje.52.1.95

Cakrani, E. Resulaj, R. & Koprencka, L. (2013). Government Spending and Real Exchange Rate Case of Albania. European Journal of Sustainable Development, 2(4), 303-310.

Carp, L. (2012). Can Stock Market Development Boost Economic Growth? Empirical Evidence from Emerging Markets in Central and Eastern Europe. Procedia Economics and Finance, 3, 438-444. doi:10.1016/s2212-5671(12)00177-3

Carrera, C. (2015). Tracking exchange rate management in Latin America. Review of Financial Economics, 25, 35-41. doi:10.1016/j.rfe.2015.02.004

Carriere-Swallow, Y., Jacome H., L. I., Magud, N., Werner, A. (2016). Central Banking in Latin America: The Way Forward. IMF Working Papers, 16(197), 1. doi:10.5089/9781475543353.001

Carstens, A. G., & Werner, A. M. (2000). Mexico's monetary policy framework under a floating exchange rate regime. Inflation targeting in practice: Strategic and operational issues and application to emerging market economies, 80-86.

Castillo Ponce, R. A., Rodríguez Espinosa, M. de L., & Gaytan Alfaro, E. D. (2015). Stock market development and economic performance: The Case of Mexico. Revista de Análisis Económico, 30(1), 41-56. doi:10.4067/s0718-88702015000100003

Chatziantoniou, I., Duffy, D., & Filis, G. (2013). Stock market response to monetary and fiscal policy shocks: Multi-country evidence. Economic Modelling, 30, 754-769. doi:10.1016/j.econmod.2012.10.005

Choy Chong, M. (1999). Monetary policy operating procedures in Peru. Monetary Policy Operating Procedures in Emerging Market Economies, Bank for International Settlements Policy Papers, No 5. https://www.bis.org/publ/plcy05i.pdf

Christiano, L., Eichenbaum, M., & Rebelo, S. (2011). When Is the Government Spending Multiplier Large? Journal of Political Economy, 119(1), 78-121. doi:10.1086/659312

Corbo, V., Elberg, E. & Tessada, J. (1999). Monetary policy in Latin América: Underpinnings and procedures. Cuadernos de Economía, 36(109), 897-927.

Cosset, J.-C., & Roy, J. (1991). The Determinants of Country Risk Ratings. Journal of International Business Studies, 22(1), 135–142. doi:10.1057/palgrave.jibs.8490296

D’Auria, F. (2014). The effects of fiscal shocks in a new keynesian model with useful government spending. Macroeconomic Dynamics, 19(6), 1380-1399. doi:10.1017/s1365100513000874

Dailami, M. & Atkin, M. (1990). Stock market in developing countries: key issues and a research agenda. Vol. 515. World Bank Publications.

Damodaran, A. (2018). Country Risk: Determinants, Measures and Implications - The 2018 Edition. SSRN Electronic Journal. doi:10.2139/ssrn.3217944

Damodaran, A. (2018). Country Risk: Determinants, Measures and Implications - The 2018 Edition (July 23, 2018). Available at SSRN: https://ssrn.com/abstract=3217944 or http://dx.doi.org/10.2139/ssrn.3217944

De Gregorio, J., & Guidotti, P. E. (1995). Financial development and economic growth. World Development, 23(3), 433-448. doi:10.1016/0305-750x(94)00132-i

Demirgüç-Kunt, A. (2012). Finance and Economic Development. The Oxford Handbooks of Banking. doi:10.1093/oxfordhb/9780199640935.013.0029

Di Giorgio, G., Nisticò, S., & Traficante, G. (2018). Government spending and the exchange rate. International Review of Economics & Finance, 54, 55-73. doi:10.1016/j.iref.2017.07.030

Di Mauro F, Rueffer R, Bunda I. 2008. The changing role of the exchange rate in a globalised economy. ECB Occasional Paper Series, No.94.

Durham, J. B. (2001). The Effect of Monetary Policy on Monthly and Quarterly Stock Market Returns (October 2001). Available at SSRN: https://ssrn.com/abstract=293102 or http://dx.doi.org/10.2139/ssrn.293102

Eggertsson, G. B. (2011). What Fiscal Policy Is Effective at Zero Interest Rates? NBER Macroeconomics Annual, 25(1), 59-112. doi:10.1086/657529

Ehrmann, M., & Fratzscher, M. (2004). Taking Stock: Monetary Policy Transmission to Equity Markets. Journal of Money, Credit, and Banking, 36(4), 719-737. doi:10.1353/mcb.2004.0063

Fernández-Amador, O., Gächter, M., Larch, M., & Peter, G. (2013). Does monetary policy determine stock market liquidity? New evidence from the euro zone. Journal of Empirical Finance, 21(1), 54-68. doi:10.1016/j.jempfin.2012.12.008

Fetai, B. (2017). The effects of fiscal policy during the financial crises in transition and emerging countries: does fiscal policy matter? Economic Research-Ekonomska Istraživanja, 30(1), 1522-1535. doi:10.1080/1331677x.2017.1340181

FK, S. (2018). Effect of Interest Rate on Economic Growth: Swaziland as a Case Study. Journal of Business & Financial Affairs, 07(03). doi:10.4172/2167-0234.1000345

Förster, B., & Hayo, B. (2016). Monetary and Fiscal Policy in Times of Crisis: A New Keynesian Perspective in Continuous Time. The Manchester School, 86(1), 21-48. doi:10.1111/manc.12173

Furceri, D., & Zdzienicka, A. (2010). The real effect of financial crises in the European transition economies. Economics of Transition, 19(1), 1-25. doi:10.1111/j.1468-0351.2010.00395.x

Galí, J. (2002). New perspectives on monetary policy, inflation, and the business cycle. NBER Working Paper No. 8767. National Bureau of Economic Research.

Galí, J., & Gambetti, L. (2015). The Effects of Monetary Policy on Stock Market Bubbles: Some Evidence. American Economic Journal: Macroeconomics, 7(1), 233-257. doi:10.1257/mac.20140003

Garcia-Herrero, A., Girardin, E., & Lopez Marmolejo, A. (2015). Mexico's monetary policy communication and money markets. BBVA Working Paper, No.15/15.

García-Sicco, J. & Kawamaura, E. (2014). Central Bank Liquidity Management and "Unconventional" Monetary Policies. Economía, 15(1), 39-87. Special Issue on Inflation targeting in Latin America.

Giannoulakis, S. (2017). Fiscal and Monetary Policy in a New Keynesian Model with Tobin’s Q Investment Theory Features, MPRA Paper 80892, University Library of Munich, Germany.

Hailemariam, A. (2014). Stock Market Development and Economic Growth: Empirical Evidence for Emerging Market Economies. International Journal of Economics, Finance and Management Sciences, 2(2), 171. doi:10.11648/j.ijefm.20140202.19

Hassan, M, & Nassar, R. (2015). Empirical investigation of the relationship between long term interest rate and government debtt and déficit spending. Journal of Economics and Economic Education Research, 16, 1.

Hatemi-J, A., & S. Hacker, R. (2009). Can the LR test be helpful in choosing the optimal lag order in the VAR model when information criteria suggest different lag orders? Applied Economics, 41(9), 1121-1125. doi:10.1080/00036840601019273

Hayford, M. D., & Malliaris, A. G. (2004). Monetary Policy and the U.S. Stock Market. Economic Inquiry, 42(3), 387-401. doi:10.1093/ei/cbh068

Heaney, R., Hooper, V., & Jaugietis, M. (2002). Regional Integration of Stock Markets in Latin America. Journal of Economic Integration, 17(4), 745–760. doi:10.11130/jei.2002.17.4.745

Vega, M. A. H. (2017). Portfolio investment response to US monetary policy announcements: An event study analysis using high frequency data from Mexico (No. 2017-02). Working Papers.

Herrera, F. L., Salgado, R. J. S., & Ake, S. C. (2015). Volatility dependence structure between the Mexican Stock Exchange and the World Capital Market. Investigación Económica, 74(293), 69–97. doi:10.1016/j.inveco.2015.06.001

Iacoviello, M. (2005). House Prices, Borrowing Constraints, and Monetary Policy in the Business Cycle. American Economic Review, 95(3), 739–764. doi:10.1257/0002828054201477

Ioannidis, C., & Kontonikas, A. (2008). The impact of monetary policy on stock prices. Journal of Policy Modeling, 30(1), 33–53. doi:10.1016/j.jpolmod.2007.06.015

Ireland, P. N. (2010). Monetary transmission mechanism. In Monetary economics (pp. 216-223). Palgrave Macmillan, London. doi:10.1057/9780230280854_26

Isola Lawal, A., Olukayode Somoye, R., Ayoopo Babajide, A., & Ikechukwu Nwanji, T. (2018). The effect of fiscal and monetary policies interaction on stock market performance: Evidence from Nigeria. Future Business Journal, 4(1), 16-33. doi:10.1016/j.fbj.2017.11.004

Anghelache, G. V., Jakova, S., & Oanea, D. C. (2016). Fiscal policy and capital market performance: Evidence from EU countries from central and eastern Europe. International Journal of Academic Research in Accounting, Finance and Management Sciences, 6(2), 34-43. doi:10.6007/ijarafms/v6-i2/2037

Kaminsky, G. L., & Schmukler, S. L. (2007). Short-Run Pain, Long-Run Gain: Financial Liberalization and Stock Market Cycles. Review of Finance, 12(2), 253-292. doi:10.1093/rof/rfn002

Karunasena, A. (1996). Siri Lanka’s experience, policy paper no. 1. In Changing Financial Systems in small Open Economies. Based: Bank for International Settlements.

Kilian, L. (2009). Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market. American Economic Review, 99(3), 1053-1069. doi:10.1257/aer.99.3.1053

King, R. G., & Levine, R. (1993). Finance and Growth: Schumpeter Might Be Right. The Quarterly Journal of Economics, 108(3), 717-737. doi:10.2307/2118406

Kühn, S., Muysken, J., & Van Veen, T. (2010). The adverse effect of government spending on private consumption in new keynesian models. Metroeconomica, 61(4), 621-639. doi:10.1111/j.1467-999x.2009.04084.x

Lahrech, A., & Sylwester, K. (2011). U.S. and Latin American stock market linkages. Journal of International Money and Finance, 30(7), 1341-1357. doi:10.1016/j.jimonfin.2011.07.004

Lahura, E., & Vega, M. (2016). Stock market development and real economic activity in Peru. Empirical Economics, 53(3), 1011-1038. doi:10.1007/s00181-016-1149-6

Laopodis, N. T. (2009). Dynamic linkages between monetary policy and the stock market. Review of Quantitative Finance and Accounting, 35(3), 271-293. doi:10.1007/s11156-009-0154-7

Laopodis, N. T. (2009). Fiscal policy and stock market efficiency: Evidence for the United States. The Quarterly Review of Economics and Finance, 49(2), 633-650. doi:10.1016/j.qref.2007.10.004

Leith, C., & von Thadden, L. (2008). Monetary and fiscal policy interactions in a New Keynesian model with capital accumulation and non-Ricardian consumers. Journal of Economic Theory, 140(1), 279-313. doi:10.1016/j.jet.2007.07.005

Levine, R. (1999). Financial Development and Economic Growth: Views and Agenda. Policy Research Working Papers. doi:10.1596/1813-9450-1678

Levine, R. (2002). Bank-Based or Market-Based Financial Systems: Which Is Better? Journal of Financial Intermediation, 11(4), 398-428. doi:10.1006/jfin.2002.0341

Lin, A. & Swanson, P. (2008). The Effect of China's Reform Policies on Stock Market Information Transmission.  Quarterly Journal of Finance and Accounting. 47(3), 49-76.

Lizarzaburu Bolaños, E. R., Burneo, K., Galindo, H., & Berggrun, L. (2015). Emerging Markets Integration in Latin America (MILA) Stock market indicators: Chile, Colombia, and Peru. Journal of Economics, Finance and Administrative Science, 20(39), 74-83. doi:10.1016/j.jefas.2015.08.002

Loayza, N. & Schmidt-Hebbel, K. (2002). Monetary Policy Functions and Transmission Mechanisms: An Overview, Central Banking, Analysis, and Economic Policies Book Series, in: Norman Loayza & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series (ed.), Monetary Policy: Rules and Transmission Mechanisms, edition 1, volume 4(1), 1-20. Central Bank of Chile.

Lütkepohl, H., & Netšunajev, A. (2018). The Relation between Monetary Policy and the Stock Market in Europe. Econometrics, 6(3), 36. doi:10.3390/econometrics6030036

Mankiw, N. G. (1987). Government Purchases and Real Interest Rates. Journal of Political Economy, 95(2), 407-419. doi:10.1086/261462

Mendoza, W. & Melgarejo, K. (2008). La efectividad de la política fiscal en el Perú:1980-2006. Pontificie Universidad Catolica del Peru. Working Paper, 2008(262).

Mishkin, F. (2001). The Transmission Mechanism and the Role of Asset Prices in Monetary Policy. National Bureau of EconomicResearch, (w8617). doi:10.3386/w8617

Mishkin, F. S., & Savastano, M. A. (2001). Monetary Policy Strategies for Latin America. Policy Research Working Papers. doi:10.1596/1813-9450-2685

Miyamoto, W., Nguyen, T. L., & Sheremirov, V. (2019). The effects of government spending on real exchange rates: Evidence from military spending panel data. Journal of International Economics, 116, 144-157. doi:10.2139/ssrn.2865512

Muscatelli, A., Tirelli, P., & Trecroci, C. (2006). Fiscal and monetary policy interactions in a new Keynesian model with liquidity constraints. Available at SSRN 880084. doi:10.2139/ssrn.880084

Njikam, O. (2017). Financial liberalization and growth in African economies: The role of policy complementarities. Review of Development Finance, 7(1), 73-83. doi:10.1016/j.rdf.2017.02.001

Odhiambo, N. M. (2009). Interest Rate Liberalization and Economic Growth in Zambia: A Dynamic Linkage. African Development Review, 21(3), 541-557. doi:10.1111/j.1467-8268.2009.00222.x

Orrego, F. & Vega, G. (2013). Dutch disease and fiscal policy. Banco Central de Reserva, Working Paper, 2013(21).

Palić, P., Posedel Šimović, P., & Vizek, M. (2017). The Determinants of Country Risk Premium Volatility: Evidence from a Panel VAR Model. Croatian Economic Survey, 19(1), 37-66. doi:10.15179/ces.19.1.2

Rajan, R., & Zingales, L. (1998). Financial Dependence and Growth. The American Economic Review, 88(3), 559-586. Retrieved from http://www.jstor.org/stable/116849

Ravenna, F., & Walsh, C. E. (2006). Optimal monetary policy with the cost channel. Journal of Monetary Economics, 53(2), 199-216. doi:10.1016/j.jmoneco.2005.01.004

Razin, A. (1990). Fiscal policies and the integrated world stock market. Journal of International Economics, 29(1-2), 109-122. doi:10.1016/0022-1996(90)90066-u

Romero-Meza, R., Bonilla, C., Benedetti, H., & Serletis, A. (2015). Nonlinearities and financial contagion in Latin American stock markets. Economic Modelling, 51, 653-656. doi:10.1016/j.econmod.2015.09.012

Rossini, R., Quispe, Z. & Loyola, J. (2012). Fiscal Policy considerations in the design of monetary policy in Perú. Banco Central de Reserva, Working Paper, 2012(22).

Sanchez, M. (2008). The link between interest rates and exchange rates: do contractionary depreciations make a difference? International Economic Journal, 22(1), 43-61. doi:10.1080/10168730801898981

Santillán Salgado, R. J. (2011). Is the Mexican Stock Market Becoming More Efficient? Revista Mexicana de Economía y Finanzas, 6(1), 87-102. doi:10.21919/remef.v6i1.16

Schmukler, S. L., Gozzi, J. C., & De la Torre, A. (2007). Capital Market Development: Whither Latin America? Policy Research Working Papers. doi:10.1596/1813-9450-4156

Jeanneau, S., & Tovar, C. E. (2008). Domestic securities markets and monetary policy in Latin America: overview and implications. New financing trends in Latin America: A bumpy road towards stability, 140-63.

Sugeng, S., Nugroho, M. N., Ibrahim, I., & Yanfitri, Y. (2010). Effects of foreign Exchange supply and demand dynamics to rupiah Exchange rate and economic performance. Buletin Ekonomi Moneter Dan Perbankan, 12(3), 289-328. doi:10.21098/bemp.v12i3.374

Suhaibu, I., Harvey, S. K., & Amidu, M. (2017). The impact of monetary policy on stock market performance: Evidence from twelve (12) African countries. Research in International Business and Finance, 42, 1372-1382. doi:10.1016/j.ribaf.2017.07.075

Tavares, J. & Valkanov, R. (2003). Fiscal Policy and Asset Returns. University of California, Working Paper.

Thanh, T. T. T., Thuy, L. P., Anh, T. N., Thi, T. D., & Truong, T. T. H. (2017). Empirical Test on Impact of Monetary Policy and Fiscal Policy on Vietnam Stock Market. International Journal of Financial Research, 8(2), 135. doi:10.5430/ijfr.v8n2p135

Thorbecke, W. (1997). On Stock Market Returns and Monetary Policy. The Journal of Finance, 52(2), 635-654. doi:10.2307/2329493

Vtyurina, S., & Leal, Z. (2016). Fiscal Multipliers and Institutions in Peru: Getting the Largest Bang for the Sol. IMF Working Papers, 16(144), 1. doi:10.5089/9781498381017.001

Wang, Y.-C., Tsai, J.-J., & Li, Q. (2017). Policy Impact on the Chinese Stock Market: From the 1994 Bailout Policies to the 2015 Shanghai-Hong Kong Stock Connect. International Journal of Financial Studies, 5(1), 4. doi:10.3390/ijfs5010004

Wongswan, J. (2009). The response of global equity indexes to U.S. monetary policy announcements. Journal of International Money and Finance, 28(2), 344-365. doi:10.1016/j.jimonfin.2008.03.003

Woodford, M. (2003). Interest and Prices: Foundations of a Theory of Monetary Policy, Princeton University Press.

Zeng, F., Huang, W.-C., & Hueng, J. (2016). On Chinese Government’s Stock Market Rescue Efforts in 2015. Modern Economy, 07(04), 411-418. doi:10.4236/me.2016.74045

 

Page: 
20-51.
Content Status: 
Published