Does Fiscal Policy Matter for Stock-Bond Return Correlation?
We explore an important role of monetary-fiscal policy interactions in explaining three stylized facts: (1) a positive correlation of stock and bond returns in 1971-2001 and a negative one after 2001, (2) a negative correlation of consumption and inflation in 1971-2001 and a positive one after 2001, and (3) the coexistence of a positive bond risk premium and a negative correlation of stock and bond returns. Our general equilibrium model shows that these correlation changes across two policy regimes are driven by a combination of technology and investment shocks, while positive risk premiums are driven by the technology shock only.
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Copy CitationErica X.N. Li, Tao Zha, Ji Zhang, and Hao Zhou, "Does Fiscal Policy Matter for Stock-Bond Return Correlation?," NBER Working Paper 27861 (2020), https://doi.org/10.3386/w27861.Download Citation
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Published Versions
Erica X.N. Li & Tao Zha & Ji Zhang & Hao Zhou, 2022. "Does Fiscal Policy Matter for Stock-Bond Return Correlation?," Journal of Monetary Economics, . citation courtesy of 
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