The fiscal multiplier when debt is denominated in foreign currency

Marie-Pierre Hory, Grégory Levieuge and Daria Onori

International Economics, 2023, vol. 176, issue C

Abstract: In this paper, we show that the proportion of private debt denominated in foreign currency can be a determinant of the size of the domestic fiscal multiplier. The demonstration relies on a two-country New Keynesian DSGE model with nominal rigidities and financial frictions. In line with recent evidence, the model can reproduce the depreciation of the domestic currency following an increase in public spending. We show that, in this case, the increase in debt burden denominated in foreign currency deteriorates the domestic firms’ balance sheets. This raises their external finance premium and crowds out private investment, ultimately offsetting the stimulative effect of the government spending shock.

Keywords: Fiscal multiplier; Exchange rate; Currency mismatch; DSGE model; Financial frictions (search for similar items in EconPapers)
JEL-codes: E62 F34 F41 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:inteco:v:176:y:2023:i:c:s2110701723000707

DOI: 10.1016/j.inteco.2023.100458

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