Fiscal Transmission to Asset Prices in the United States: Evidence from Deficit Shocks, 2002–2024

This article asks how United States asset prices respond to shocks in the federal deficit and whether the response is stable. We estimate a recursive VAR on 265 monthly observations, 2002–2024. A deficit shock of one standard deviation is followed on average over 12 months by rises of 0.55% in house prices and 1.97% in the S&P 500 and a narrower corporate spread; gold’s response is not significant. The equity average is not stable: a sup-F test places a break in the coefficients on the deficit in March 2009 (p = 0.002), the local projection response is not significant in the full sample (p = 0.153) and does not differ significantly between recessions and expansions, and it is imprecise without the crisis windows. House prices respond positively in local projections, but not in a VAR from 2009 alone. The fiscal dominance ratio is above one in nine of ten combinations of specification and metric, but housing accounts for most of the variance ratios. The deficit ratio is associated with the top 1% wealth share within the quarter, not cumulatively. The estimates are conditional associations; the deficit shock is not free of reactions to markets.