Debt maturity and government spending multipliers

Morteza Ghomi, Jochen Mankart, Rigas Oikonomou and Romanos Priftis
Additional contact information
Morteza Ghomi: BANCO DE ESPAÑA
Jochen Mankart: DEUTSCHE BUNDESBANK AND NÁRODNÁ BANKA SLOVENSKA
Rigas Oikonomou: UC LOUVAIN AND UNIVERSITY OF SURREY
Romanos Priftis: EUROPEAN CENTRAL BANK

No 2532, Working Papers from Banco de España

Abstract: Government spending effectiveness depends critically on how it is financed. Using state-dependent SVAR models and local projections on post-war US data, we show that fiscal expansions financed with short-term debt generate significantly larger output multipliers than those financed with long-term debt. This difference mainly stems from private consumption responses: short-term financing crowds in consumption while long-term financing does not. To rationalize this finding, we construct an incomplete markets model in which households invest in short-term and long-term assets. Short assets provide liquidity/safety services; households can (more readily) use them to cover sudden idiosyncratic spending needs. An increase in the supply of these assets, through a short-term debt-financed government expenditure shock, boosts private consumption. We first show this mechanism analytically in a simplified model, and then quantify it in a carefully calibrated New Keynesian model. We find that fiscal multipliers differ substantially across financing modes, with short-term-financed shocks typically exceeding unity while long-term-financed shocks typically fall below unity. We show these differences persist across monetary and fiscal policy regimes, with important implications for optimal debt management and stimulus design.

Keywords: spending multiplier; fiscal policy; debt maturity; incomplete markets; SVAR; local projections (search for similar items in EconPapers)
JEL-codes: D52 E31 E43 E62 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2025-09
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:2532

DOI: 10.53479/40745

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