Date of Degree


Document Type


Degree Name





Merih Uctum

Committee Members

Christos Giannikos

Chun Wang

Subject Categories

International Economics | Macroeconomics


Fiscal policy, country risk, time series


This dissertation examines the domestic and international effects of fiscal policy shocks on country risk, stock markets returns and trading partners. There are three essays in this study.

First essay examines the relative impacts of macroeconomic, financial and political variables on country risk for five advanced economies; the US, the UK, Canada and Singapore for 1984:M1-2014:M12 and Germany for 1990:M9-2014:M12 time periods. To do so, I follow a two stage estimation procedure. In the first stage, a CAPM is used to estimate time-variant country betas which are used as a proxy for country risk by using a DCC-GARCH model. Then, at the second stage, time variant country betas are regressed on a set of macroeconomic, financial and political variables to distinguish the relative effects of each variable on country risk. Finally, a Kalman Filter approach is used to re-estimate time-variant country betas as a robustness check. The empirical findings of this study show that even though the significance and the direction of the impacts of risk factors differ from one country to another, among macroeconomic variables, budget surplus and current account surplus have significant effects on most country betas, whereas, generally, political risk does not have a significant effect on country risk in advanced economies.

In the second essay, I characterize the effects of fiscal policy shocks on aggregate and sectoral stock market returns in the US for 1975-2013 period with a Structural Vector AutoRegressive (SVAR) Model. The results of this study show that in case of an expansionary (tight) fiscal policy, aggregate stock market returns decrease (increase). Unexpectedly, neither sectoral stock returns respond to policy shocks in the same direction, nor is there an observed co-movement between the reactions of stock returns of different sectors. As energy and utility sector returns move in the same direction with aggregate returns, financial sector returns move in the opposite direction. Moreover, both positive government spending and positive government revenue shocks decrease industrial sector returns whereas increase healthcare sector returns.

Finally, the third essay characterizes the results of US government spending shocks on domestic and foreign economies. To do so, I analyze the dynamic effects of a positive US government spending shock on real output and real household consumption of Canada and the US, as well as, the real exchange rate from 1957 to 2013 by employing a SVAR model. The findings of the study state empirical evidence in favor of a positive international transmission of domestic fiscal expansion. A positive US government spending shock increases not only US output and consumption but also Canadian output, as the real exchange rate appreciates.