Fiscal multipliers and foreign holdings of public debt

Fernando Broner, Daragh Clancy, Alberto Martin and Aitor Erce

Working Papers from European Stability Mechanism

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. Thus, these crowding-out effects are likely to be weaker when public debt is purchased by foreigners. We test this hypothesis on (i) post-war US data and (ii) data 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 a large set of advanced economies. 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: sovereign debt; fiscal multiplier; foreign holdings of public debt (search for similar items in EconPapers)
JEL-codes: F32 F34 F36 F41 F43 F44 F65 G15 (search for similar items in EconPapers)
Pages: 72
Date: 2018-03-28
New Economics Papers: this item is included in nep-opm
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Citations: View citations in EconPapers (17)

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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:stm:wpaper:30

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