Paper #1610

Title:

Fiscal multipliers and foreign holdings of public debt

Authors:

Fernando Broner, Daragh Clancy, Alberto Martin and Aitor Erce

Date:

December 2017 (Revised: April 2021)

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 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 codes:

E62, F32, F34, F36, F41, F62, F65, G15, H63

Area of Research:

Macroeconomics and International Economics

Published in:

Review of Economic Studies, 89(3), 2022, 1155–1204.

Comment:

Attachments:
Online Appendix

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