An empirical analysis of changes of the impact of federal budget deficits on stock market returns: evidence from the US economy

We investigate the causality between the real federal budget deficit returns and real stock market returns for the US economy. We divide the overall sample into two sub-samples running from 1968:1 to 1988:3 and from 1988:4 to 2011:3. In contrast to earlier studies, we find a significant positive relationship between real stock market returns and real federal budget deficit returns for both samples. Moreover, we find that the stochastic interrelations between these variables have considerably changed over time.