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Government debt expansion and stock returns
Author(s) -
Wisniewski Tomasz Piotr,
Jackson Peter M.
Publication year - 2021
Publication title -
international journal of finance and economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 39
eISSN - 1099-1158
pISSN - 1076-9307
DOI - 10.1002/ijfe.2052
Subject(s) - economics , basis point , government debt , monetary economics , stock (firearms) , stock market index , debt ratio , liberian dollar , debt to gdp ratio , debt , stock market , external debt , internal debt , financial economics , interest rate , macroeconomics , finance , mechanical engineering , paleontology , horse , biology , engineering
Using an international data set, this article documents a negative association between increases in the central government debt‐to‐GDP ratio and dollar‐denominated stock index returns. Depending on the estimation method, raising the debt ratio by 1 percentage point diminishes the stock returns by between 39 and 95 basis points. We show that this result cannot be explained by changes in the investment risk. Instead, government debt issuance exerts upward pressure on private interest rates and appears to signal a greater tax burden in the future. These two factors coincide to produce a fall in stock market prices.