Abstract: Fiscal announcements may transfer information about the government's view of the macroeconomic outlook to the private sector, diminishing the effectiveness of fiscal policy as a stabilization tool. We develop a simple model that transparently outlines conditions and key properties of the signaling effect and guides our empirical tests, and we show that results hold in a standard microfounded model. We construct a novel dataset that combines daily data on Japanese stock prices with narrative records from press releases about a set of extraordinary fiscal packages introduced by the Japanese government from 2011-2020. We show that these fiscal stimuli were often interpreted as negative news by the stock market whereas exogenous fiscal interventions that do not convey any information about the business cycle (e.g., the successful bids to host the Olympics on September 8, 2013) fostered bullish reactions. In addition, these negative effects on stock prices arose more commonly when fiscal stimuli were announced against a backdrop of heightened macroeconomic uncertainty. Our empirical findings support the theory of signaling effects.



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