Dennis W. Jansen, Qi Li, Zijun Wang, and Jian Yang
Journal of Econometrics Vol. 147, Issue 1, p. 141-150
This paper contributes to the literature in two important aspects. We first examine the role of fiscal policy on the U.S. stock and bond markets, and we document the conditioning information role of fiscal policy via interactions with monetary policy, a feature that has been forcefully emphasized in the recent theoretical literature but not yet thoroughly investigated empirically. The few existing empirical works only consider the role of fiscal policy as a direct information variable separate from monetary policy. Second, we employ a flexible varying coefficient specification in our econometric analysis, which has not been commonly used in this line of research. We find that a semiparametric varying coefficient model and its variants (Cai, Fan, Yao, 2000) appear to be particularly suitable for capturing the potentially complex interactions between fiscal and monetary policies.