The impact of federal budget deficits on movements in the stock market: evidence from Australia and France

Abstract

This article examines whether or not federal budget deficits impact the stock markets of Australia and France. According to the stock market efficiency hypothesis, current stock market performance fully incorporates all past policy actions and implies that there should be an insignificant effect of past deficit on current stock prices. We present evidence that fiscal policy actions, as measured by the size of past federal budget deficits, exert a significant influence upon movements in stock prices.