Professor Courtney Wiegand’s paper, “The Effect of Fiscal Policy Shocks on Asset Prices,” examines how financial markets respond to unexpected changes in the federal government’s deficit outlook, and was awarded with an Honorable Mention at the 2025 Marshall Blume Prize in Financial Research ceremony. By measuring fiscal policy shocks throughout the Congressional budget process, this research sheds light on how deficit news influences the economy. Professor Wiegand discusses her findings and their implications below.
Fiscal policy is an important macroeconomic tool, yet it seems we know less about its effects on asset prices, compared to monetary policy. Why is this the case, and what motivated you to tackle this question in your research?
Courtney Wiegand: Compared with monetary policy, we know much less about how fiscal policy affects financial markets because fiscal policymaking is much less predictable. The Federal Reserve has a clear schedule, a small group of policymakers, and carefully communicated decisions, while fiscal policy involves many members of Congress, a more uncertain timeline, and a lot of political noise. This makes it difficult to identify when markets are actually responding to new fiscal information.
My paper addresses this challenge by focusing on the Congressional budget resolution and reconciliation process. The stages of this process provide forward-looking information about the path of federal deficits several years into the future, allowing me to study how markets respond when expectations about fiscal policy change. Precisely identifying the timing and magnitude of these fiscal news events is important because financial markets are forward-looking and adjust quickly to new information.
My interest in this question came from my time working in the government. As an undergraduate, I interned on Capitol Hill, including at the House Budget Committee, where I gained firsthand insight into how the budget process works. Later, as a research assistant at the Federal Reserve Board, I saw how economists use high-frequency methods to study how financial markets respond to monetary policy announcements. It struck me that, despite fiscal policy being one of the two primary macroeconomic policy tools, we had a much more limited understanding of how fiscal news affect financial markets in real time. This motivated me to apply similar methods used in monetary policy research to fiscal policy, drawing on my understanding of the budget resolution and reconciliation process to develop a methodology tailored to the fiscal policy environment.
Which developments in the Congressional budget resolution and reconciliation process cause the most significant shocks to asset prices?
Courtney Wiegand: One of the key findings in my paper is that financial markets respond throughout the different stages of the budget resolution and reconciliation process, not just when legislation is ultimately passed. The process begins with the President’s budget proposal, continues as the House and Senate each develop their own budget resolutions, and moves into reconciliation once both chambers agree on a common budget resolution. At each stage, markets react as investors update their expectations about the future path of fiscal policy.
That said, I find that these fiscal shocks have become larger and more volatile over the past 10 to 15 years. I think this reflects the fact that fiscal policy has become much more important over the past decade. With a high government debt level and Congress considering more consequential fiscal packages, each new development seems to have become more relevant for investors.
One of your findings is that fiscal policy has a stronger impact when the Federal Reserve is constrained in its ability to adjust interest rates. Why does the impact of fiscal policy developments depend so much on the broader monetary policy environment?
Courtney Wiegand: I think this is one of the more interesting findings in the paper. Specifically, that the effects of fiscal policy depend importantly on the ability of the Federal Reserve to respond at the time. Under normal circumstances, news that future deficits will be larger than previously expected pushes interest rates higher, with much of that increase reflecting higher real interest rates. I see this effect across the yield curve, including short-term interest rates that are closely tied to monetary policy.
Things are different when the Federal Reserve is constrained by the zero lower bound. Because monetary policy has limited ability to adjust interest rates in response to fiscal news, bond markets respond much less to changes in deficit expectations. At the same time, the positive effects of fiscal policy on firms’ future earnings become relatively more important for equity markets. When the discount rate channel is muted, the boost to expected cash flows plays a larger role, leading to a stronger positive response in equity markets.
Why are your findings important for investors, financial practitioners, and policymakers to understand?
Courtney Wiegand: In an increasingly complex and polarized fiscal environment, it is helpful for investors and practitioners to understand how fiscal policy decisions can affect financial markets and asset prices. The findings in my paper can hopefully help them interpret market movements and better understand the implications of future fiscal developments. For policymakers, it is also important to understand how their own decisions transmit through financial markets, and my findings help shed light on those channels.
Looking ahead, how could future research on fiscal policy expand on your findings?
Courtney Wiegand: I think this is a really interesting time for the fiscal policy literature, and there are many open questions about how different types of fiscal policy affect financial markets. One direction for future work would be applying similar approaches to other areas of fiscal policy or other policy domains more broadly. In my paper, I focus on aggregate deficits, but another avenue to explore is whether the market response differs depending on whether fiscal changes come through government spending or revenues or whether different types of spending have different effects.
Learn more about Professor Courtney Wiegand.
See all winners of the Marshall Blume Prizes in Financial Research.