Impact of fiscal stimulus on volatility: A cross-country analysis

ABSTRACT

This study investigates the short-to-medium-term impact of Covid-19-related fiscal stimulus relief packages on reducing investor uncertainty expectations in eight major economies. We use three measures of volatility to assess investor uncertainty implied volatility, volatility index, and realized kernel volatility of ETFs in each country. The data covers a three-year period from January 2019 to December 2021. Our findings indicate an increase in all three measures of volatility in the post-Covid to pre-stimulus period, which decreases after the announcement of the stimulus packages. The results show that, on average, the stimulus announcements alleviate investor uncertainty and facilitate economic recovery. However, the effectiveness of the stimulus packages varies across countries but not across sectors. Our results remain robust to several checks, including alternate econometric specifications, such as the Arellano-Blundell-Bond estimation for dynamic panel data. © 2023 Elsevier B.V.