Fiscal Multipliers and Foreign Holdings of Public Debt

75 Pages Posted: 27 Mar 2019

See all articles by Fernando Broner

Fernando Broner

CREI; Barcelona GSE; Universitat Pompeu Fabra; CEPR

Daragh Clancy

European Stability Mechanism

Aitor Erce

European Stability Mechanism; Banco de España - Associate Directorate General International Affairs

Alberto Martin

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: March 26, 2019

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 markets to place their debt, increasing the size of multipliers. We test this hypothesis on (i) post-war US data and (ii) data for a panel of 17 advanced economies from the 1980's 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 1950's and 1960's 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

JEL Classification: E62, F32, F34, F36, F41, F62, F65, G15, H63

Suggested Citation

Broner, Fernando and Clancy, Daragh and Erce, Aitor and Martin, Alberto, Fiscal Multipliers and Foreign Holdings of Public Debt (March 26, 2019). ECB Working Paper No. 2255 (2019); ISBN 978-92-899-3517-3 . Available at SSRN: https://ssrn.com/abstract=3360934

Fernando Broner

CREI ( email )

Ramon Trias Fargas, 25-27
Barcelona, 08005
Spain
+34 93 542 2601 (Phone)

HOME PAGE: http://www.crei.cat/people/broner

Barcelona GSE

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain
+34 93 542 2601 (Phone)

Universitat Pompeu Fabra ( email )

Ramon Trias Fargas, 25-27
Barcelona, 08005
Spain
+34 93 542 2601 (Phone)

HOME PAGE: http://www.crei.cat/people/broner

CEPR ( email )

London
United Kingdom
+34 93 542 2601 (Phone)

Daragh Clancy

European Stability Mechanism ( email )

6a Circuit de la Foire Internationale
L-1347
Luxembourg

Aitor Erce (Contact Author)

European Stability Mechanism ( email )

6a Circuit de la Foire Internationale
Luxembourg, 1347
Luxembourg

Banco de España - Associate Directorate General International Affairs

Alcala 50
Madrid 28014
Spain

Alberto Martin

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI) ( email )

Ramon Trias Fargas, 25-27
Barcelona, 08005
Spain

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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