Fiscal Policy, Asset Prices, and Economic Sentiment

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This paper examines how expansionary fiscal policy shapes asset prices and economic sentiment in the United States. I estimate a daily heteroskedastic VAR within a Bayesian framework, in which fiscal shocks, capturing changes in government spending and tax policy, are identified through shifts in volatility. The model includes stock prices, implied volatility, a text-based daily economic sentiment index, the one-year Treasury yield, and the corporate bond spread. The empirical findings show that expansionary fiscal shocks generate a persistent increase in equity valuations, a pronounced decline in implied volatility and uncertainty, and a sustained improvement in news-based economic sentiment. Corporate credit spreads narrow, signaling easier external financing conditions, while short-term yields rise, consistent with expectations of subsequent monetary tightening. These results point to a clear risk-on response driven by risk-premium and confidence channels. Fiscal actions quickly reprice risk and credit conditions, offering valuable guidance for policymakers, investors, and portfolio managers assessing the macro-financial effects of discretionary fiscal measures. By combining high-frequency fiscal identification with both market-based and text-based indicators, the paper provides a more nuanced perspective on the transmission of fiscal policy to financial markets.

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