The Impact of Fiscal Policy on the U.S. Stock Market Return

Abstract

In this study, I analyze the impact of the aggregate, income, corporate, and social security tax revenues on both the U.S. output and the stock market return in a structural vector autoregression (SVAR) framework between 1960:Q1 and 2015:Q4. Unlike some of the other studies, I use not only aggregate but also disaggregated tax revenue variables to examine the impact of fiscal policy. Results show that an exogenous increase in aggregate tax revenue reduces both the output and the market return. In addition, an increase in income, corporate, and social security tax revenues reduces both output and the market return significantly at varying degrees.