Courtney Wiegand

Working Papers

The Effect of Fiscal Policy Shocks on Asset Prices

[Job Market Paper]

Fiscal policy has emerged as an important policy lever, but is less well understood than monetary policy.  One reason is the lack of high-frequency fiscal policy shocks.  In this paper, I construct such shocks and analyze their effects on asset prices.  Each year, Congress sets enforceable, forward-looking deficit targets through the budget resolution process.  By tracking innovations in these targets as the process unfolds, I identify the dates and magnitudes of deficit news that investors receive. These news shocks are unpredictable by macroeconomic news and professional forecasts, yet they predict realized deficits and forecast revisions. I find that fiscal policy shocks impact yields across the term structure; A news shock that increases the cumulative deficit-to-GDP ratio by 1% over 5 years raises 2-year yields by 2 bps and 10-year yields by 2.3 bps.  Two-thirds of the response is on real yields and one-third on breakeven inflation.  Deficit news shocks also increase the estimated term premium and reduce the Treasury convenience yield, suggesting that higher deficits make Treasuries riskier and reduce their specialness. The impact on the stock market is a combination of a discount rate effect and a cash flow news effect.  When monetary policy is constrained by the zero lower bound, the cash flow news effect dominates and the stock market rises.  In the cross section, growth-sensitive industries exhibit significantly positive responses.  These findings point to a relatively moderate growth channel (a fiscal multiplier) that is offset by monetary policy when not constrained.

Monetary Policy Risk: Uncertainty and Skewness

with Marcelo Ochoa

The literature on monetary policy has placed much emphasis on the first moment: monetary policy surprises (MPS). This paper explores the information embedded in higher-order moments of MPS by developing novel measures of uncertainty and risk surrounding the near-term path of interest rates. Using both daily and intraday data, we derive realized volatility and skewness measures from changes in Fed Funds Futures prices over intermeeting periods. These measures capture shifts in market perceptions of future interest rate risk and importantly, allow us to account for pre-FOMC news flow. We demonstrate that these measures can predict growth and employment. Additionally, we test two alternative explanations for the drivers of this predictability: (i) uncertainty about the monetary authority’s reaction function and (ii) economic uncertainty affecting the interest rate path. Using our realized volatility and skewness measures, we employ a narrative approach with sign restrictions to distinguish shocks to the reaction function from shocks to fundamentals.

Works In Progress

Cross-Sectional Stock Market Response to Government Spending Shocks: Exposure to 302(a) Allocations

Each year, the Congressional budget resolution establishes deficit targets through outlay ceilings and revenue floors. The outlay ceilings are further disaggregated and allocated to the twelve appropriations committees via 302(a) and 302(b) allocations. These granular allocations provide a real-time, sector-level measure of expected government spending, which can be mapped to industry portfolios in corresponding sectors. Analyzing the returns of these industry portfolios in response to this spending measure allows for an assessment of the cash flow channel of government spending and the cross-sectional variation in fiscal multipliers across industries.

Fiscal Policy Reach in Times of Crisis: Credit Utilization of Firms Without PPP Loans 

This paper examines how the Paycheck Protection Program (PPP), a major fiscal policy response to COVID-19, influenced the credit utilization behavior of firms that did not participate in the program. Using detailed loan-level data from the Y14 dataset and PPP data from the Small Business Administration, I analyze whether small and medium-sized enterprises (SMEs) in high-exposure industries experienced changes in credit demand and utilization during the PPP implementation. I find that non-PPP SMEs in high-exposure industries drew down less on their pre-existing credit lines, with this effect being more pronounced for firms with loans maturing during PPP implementation. These results suggest that non-PPP SMEs were either less credit-constrained or demanded less credit during the program. The findings have significant implications for understanding the transmission of fiscal policy through bank-firm networks and highlight the heterogeneity in firms' ability to utilize pre-committed credit.

Financial Markets and Heterogeneity within the Federal Reserve

The Federal Open Market Committee (FOMC) consists of members with diverse and sometimes conflicting views on optimal monetary policy. This paper examines the market implications of such disagreements. Since March 2002, FOMC statements have disclosed dissenting votes, offering a window into internal disagreements. Using data from the primary dealer survey, I show that dissenting votes and wider ranges in the Summary of Economic Projections (SEP) forecast are associated with significantly lower communication scores. In particular, a dissenting vote at the previous FOMC meeting and an FFR forecast range of one reduce the communication score by 0.504 points (approx. 1.5 SD) on a scale of one to five. This finding suggests that investors not only pay attention to internal disagreement but also perceive it negatively. I further analyze the impact of dissent on market returns and volatility at both the daily and intraday frequencies, finding that dissenting votes dampen the market response to monetary policy shocks. These findings highlight the importance of FOMC communication strategies for the transmission of monetary policy.

Treasury Issuance Shocks: Quarterly Refunding Announcements and Primary Dealer Forecasts 

Volcker Rule Limit Tightness and Desk Trading Capacity

with David McArthur and Zach Modig