Browsing by Author "Pereira, Rute Daniela Pires"
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- Spillovers of Monetary and Fiscal Policy on Financial Markets in EMU CountriesPublication . Pereira, Rute Daniela Pires; Machado, Celsa Maria de Carvalho; Ribeiro, Ana Paula FerreiraBesides being one of the alternatives for firm’s financing, stock markets, through stock prices, record firms’ market value, that reflects economic expectations and firms’ net worth and affect households’ welfare. Thus, the dynamics of stock prices is critical for both consumption and investment decisions. Moreover, these markets are deeply integrated internationally, also reacting to external determinants. While most of the studies focus on the micro/firm level-determinants of stock prices, few analyze the role of macro-determinants and, even fewer focus on the role of macroeconomic policies. Considering the impact that monetary and fiscal policies have on the economy, it is important to understand their effect on firms’ value and thus on their investment decision. Moreover, growing globalization makes non-negligible the importance of international spillovers on domestic stock market prices. In this context, we propose to analyze and assess the impact of both policies on stock prices in a group of countries of the Euro Area. Besides the lack of relevant literature focusing on these countries as a whole, the Euro Area provides a very particular case study: it has a common monetary policy while relying on individual fiscal policies for each country, and exhibits strong economic integration that makes non-negligible international spillovers from fiscal policies. To that end, we estimate a PVAR model with alternative methodologies to correct endogeneity, cross-sectional dependency and dynamic heterogeneity, using quarterly data for 12 countries of the Euro Area from 1999 to 2021. Our findings suggest that an increase in the ECB’s interest rate has a significant negative impact on domestic stock prices. Results of the effects of fiscal policies are not so robust, differing across estimation methods. A shock in domestic government spending is neutral or negative for stock prices while expansionary fiscal policy international spillovers are neutral or positive, apparently operating through interest rate and trade channels. In addition, we find that stock prices in PIIGS react less to monetary policy and domestic government spending shocks, while international spillovers from fiscal policy are larger.