Budget deficits, inflation risk, and asset prices
نویسنده
چکیده
Kitchen examines how US budget deficit news affects asset prices and concludes that news of lower deficits reduces the inflation risk premium. This paper constructs narrative histories of several deficit-reduction laws to identify when markets learned that deficits would fall. It then estimates a multi-factor model that allows the inflation risk premium to vary following news of deficit-reductions. The results indicate that there is a large and statistically significant drop in the factor price associated with inflation following news that budget deficits would decline. 2002 Elsevier Science Ltd. All rights reserved. JEL classification: F4; E0
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