Stock market response to fiscal policy shocks: Evidence from EU countries from Central and Western Europe
Stock market response to fiscal policy shocks: Evidence from EU countries from Central and Western Europe

Summary/Abstract: Expanding the existing literature regarding the relationship between fiscal policy and stock market, this paper will analyse the response of stock markets from Central and Eastern Europe (Bulgaria, Check Republic, Slovakia, Poland and Romania), to a deviation in fiscal policy by using a Vector Autoregressive model (VAR) for quarterly data, for the period 2004-2015. The effect of crisis over stock market performance is significantly negative for all analysed countries, while governmental expenditure increased in Bulgaria, Check Republic, Slovakia and Romania, and governmental revenues increased only in Check Republic, Hungary and Slovakia. The paper highlights that an increase of stock market performance leads to a decrease of governmental expenditure in Slovakia, Romania, Check Republic and Bulgaria, due to the existence of a performant private sector which comes and compensates the investments. The Romanian’s governmental expenditure decreased considerably in comparison with other countries. Also, in Poland case, there is no relation between stock market performance and governmental expenditure.

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