Fiscal Multipliers and Foreign Holdings of Public Debt

Daragh Clancy, Aitor Erce, Alberto Martin and Fernando Broner

No 1040, Working Papers from Barcelona School of Economics

Abstract: This paper explores a natural connection between fiscal multipliers and foreign holdings of public debt. Although fiscal expansions can raise domestic economic activity through various channels, they can also have crowding-out effects if the resources used to acquire public debt reduce domestic consumption and investment. These crowding-out effects are likely to be weaker when governments have access to foreign savings when selling their debt. We test this hypothesis for the US in the post-war period and for a panel of 17 advanced economies from the 1980s to the present. To do so, we assemble a novel database of public debt holdings by domestic and foreign creditors for these countries. We combine this data with standard measures of fiscal policy shocks and show that, indeed, the size of fiscal multipliers is increasing in the share of public debt held by foreigners. In particular, the fiscal multiplier is smaller than one when the foreign share is low, such as in the U.S. in the 1950s and 1960s and Japan today, and larger than one when the foreign share is high, such as in the U.S. and Ireland today.

Keywords: fiscal multiplier; sovereign debt; foreign holdings of public debt (search for similar items in EconPapers)
JEL-codes: E62 F32 F34 F36 F41 F62 F65 G15 H63 (search for similar items in EconPapers)
Date: 2018-05
New Economics Papers: this item is included in nep-mac and nep-opm
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Citations: View citations in EconPapers (15)

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Related works:
Journal Article: Fiscal Multipliers and Foreign Holdings of Public Debt (2022)
Working Paper: Fiscal multipliers and foreign holdings of public debt (2021)
Working Paper: Fiscal multipliers and foreign holdings of public debt (2019)
Working Paper: Fiscal Multipliers and Foreign Holdings of Public Debt (2018)
Working Paper: Fiscal multipliers and foreign holdings of public debt (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:bge:wpaper:1040

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