Scandinavian Working Papers in Economics

Working Paper Series,
Sveriges Riksbank (Central Bank of Sweden)

No 455: The Signaling Effects of Fiscal Announcements

Leonardo Melosi (), Hiroshi Morita (), Anna Rogantini Picco () and Francesco Zanetti ()
Additional contact information
Leonardo Melosi: European University Institute and CEPR
Hiroshi Morita: Tokyo Institute of Technology
Anna Rogantini Picco: European Central Bank and CEPR
Francesco Zanetti: University of Oxford and CEPR

Abstract: Announcing a large fiscal stimulus may signal the government’s pessimism about the severity of a recession to the private sector, impairing the stabilizing effects of the policy. Using a theoretical model, we show that these signaling effects occur when the stimulus exceeds expectations and are more noticeable during periods of high economic uncertainty. Analysis of a new dataset of daily stock prices and fiscal news in Japan supports these predictions. We introduce a method to identify fiscal news with different degrees of signaling effects and find that such effects weaken or, in extreme cases, even completely undermine the stabilizing impact of the announcements.

Keywords: Fiscal policy; macroeconomic stabilization; uncertainty; imperfect information

JEL-codes: D83; E32; E62

Language: English

68 pages, August 1, 2025

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