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Fiscal multipliers and foreign holdings of public debt


Working papers

Fiscal multipliers and foreign holdings of public debt

Download PDF: Working Paper 30

This paper finds that the effects of fiscal expansions on economic activity are stronger when governments have access to foreign sources of finance.

Authors: Fernando Broner (CREI, Universitat Pompeu Fabra, and Barcelona GSE), Daragh Clancy (ESM), Alberto Martin (CREI, Universitat Pompeu Fabra, and Barcelona GSE) and Aitor Erce (ESM)



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.

Disclaimer: This Working Paper should not be reported as representing the views of the ESM. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the ESM or ESM policy. No responsibility or liability is accepted by the ESM in relation to the accuracy or completeness of the information, including any data sets, presented in this Working Paper.

Keywords: sovereign debt, fiscal multiplier, foreign holdings of public debt

JEL codes: F32, F34, F36, F41, F43, F44, F65, G15

Source: European Stability Mechanism | Working Paper Series | Volume 2018 | No 30 | March 2018 | 72 Pages

Copyright © European Stability Mechanism, 2018 | All rights reserved. Any reproduction, publication and reprint in the form of a different publication, whether printed or produced electronically, in whole or in part, is permitted only with the explicit written authorisation of the European Stability Mechanism.

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