Score contribution per author:
α: calibrated so average coauthorship-adjusted count equals average raw count
This paper uses structural VARs to show that the response of US stock prices to fiscal shocks changed in 1980. Over the period 1955–1979 an expansionary spending or revenue shock was associated with higher stock prices. After 1980 the response of stock prices to the same shock became negative. Using a DSGE model with a detailed fiscal sector, we show the pre-1980 results may be driven by an expansion in supply after the fiscal shock. In contrast, endogenous growth mechanisms appear to be weaker in the post-1980 period with positive fiscal shocks pushing down consumption and TFP and causing inflation and the real interest rate to rise.