Type: Working Paper
Sources of borrowing and fiscal multipliers
Working Paper, EUI ECO, 2017/01
PRIFTIS, Romanos, ZIMIC, Srecko, Sources of borrowing and fiscal multipliers, EUI ECO, 2017/01 - http://hdl.handle.net/1814/44979
Retrieved from Cadmus, EUI Research Repository
We find that debt-financed government spending multipliers vary considerably depending on the location of the debt holder. In a sample of 59 countries we find that government spending multipliers are larger when government purchases are financed by issuing debt to foreign investors (non-residents), compared to the case when government purchases are financed by issuing debt to home investors (residents). In a theoretical model we show that the location of the government debt holder produces these differential responses through the extent that private investment is crowded out in each case. Increasing international capital mobility of the resident private sector decreases the difference between the two types of financing, a prediction, which is also confirmed by the data. The share of rule-of-thumb workers, as well as the strength of the public good in the utility function play a key role in generating model-based fiscal multipliers, which are quantitatively comparable with those of the data.
Cadmus permanent link: http://hdl.handle.net/1814/44979
Series/Number: EUI ECO; 2017/01