Stock Returns, Money, and Fiscal Deficits

Using the FPE/multivariate Granger-causality modeling technique, this paper tests whether changes in Canadian stock returns are caused by a number of economic variables, including base money and fiscal deficits. The empirical results from monthly data show that lagged changes in fiscal deficits, in particular, Granger-cause stock returns. If expected returns to equity are not time-varying, such a finding appears inconsistent with market efficiency.