Sources of Borrowing and Fiscal Multipliers

Priftis, Romanos; Zimic, Srečko

doi:10.1093/ej/ueaa051

Cited by 10 publications

(6 citation statements)

References 54 publications

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“…Inverse relationships also hold when we control for the fraction of government foreign debt-to-GDP. The coefficient for foreign public debt-to-GDP is negative and consistent with the predictions inPriftis and Zimic [2018] andBroner et al [2018] However, we only have 19 observations in this specification as there are no data for Belgium, Denmark, France, Germany, Japan, New Zealand, Norway, and Poland.14 Miranda-Pinto et al[2019] lay out a theory of saving-constrained households and demonstrate that in a dynamic setting with incomplete markets, saving-constrained households exist in the stationary equilibrium (they do not fully precautionarily save to avoid the constraint in a calibrated model). The paper shows that the existence of saving-constrained households provides an explanation for puzzling aspects of the microdata.…”

supporting

confidence: 84%

Saving Constraints, Debt, and the Credit Market Response to Fiscal Stimulus

Miranda-Pinto¹,

Murphy²,

Walsh³

et al. 2020

SSRN Journal

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We document that the interest rate response to fiscal stimulus (IRRF) is lower in countries with high inequality or high household debt. To interpret this evidence we develop a model in which households take on debt to maintain a consumption threshold (saving constraint). Now debt-burdened, these households use additional income to deleverage. In economies with more debt-burdened households, increases in government spending tighten credit conditions less (relax credit conditions more), leading to smaller increases (larger declines) in the interest rate. Our theoretical framework predicts that the negative relationship between the IRRF and debt only holds when credit is not restricted. It also predicts that the consumption response to fiscal stimulus is falling in debt and inequality (only during periods of relaxed credit). We perform a series of empirical tests and find support for these predictions. In doing so, we provide context to recent evidence on the debt-dependent effects of government spending by highlighting that the relationship between debt and fiscal effects varies with credit conditions.

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supporting

confidence: 84%

Saving Constraints, Debt, and the Credit Market Response to Fiscal Stimulus

Miranda-Pinto¹,

Murphy²,

Walsh³

et al. 2020

SSRN Journal

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“…In the spirit of [20,44], we condition sample splitting on descriptive statistics of country characteristics. We assigned scores from 1 to 3 to each value of the indicator.…”

Section: Methods and Datamentioning

confidence: 99%

“…Declining real interest rate stimulates consumption, investment, and output, therefore avoiding the crowding-out effect. Priftis and Zimic [20] find that a way of financing government spending determines whether the crowding-out or crowding-in effect on private investment may be expected. If spending is financed abroad, investment is crowded in, while home-debt financed spending produces a crowding out of private investment.…”

Section: Literature Review 21 Public Debt's Impact On Economic Growth and Fiscal Multipliermentioning

confidence: 99%

The Heterogeneous Public Debt–Growth Relationship: The Role of the Expenditure Multiplier

et al. 2021

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Currently countries are facing a new crisis caused by the COVID-19, which leads to the rise of government expenditures and additional borrowing. This situation highlights the importance of examine factors which determine the level of public debt that still sustains economic growth. A growing body of research supports the idea of a non-linear debt–growth relationship and estimates the threshold level above which debt becomes unsustainable and has a negative effect on output. The empirical evidence points out that there is no single sustainable debt threshold level that holds for all countries. This research complements scarce empirical evidence on the heterogeneous debt–growth relationship and provides some insights on the publicly available statistical indicators that might signal a relatively low/high expenditure multiplier and, at the same time, potentially unsustainable/sustainable growth stimulus through the use of borrowed funds. We test the hypothesis that the expenditure multiplier is shaping the impact of public debt on growth. Our empirical examination is based on panel data analysis in the groups of countries with expected relatively high and low expenditure multiplier. Research results show that a statistically significant negative marginal effect of debt on growth starts to manifest at a lower debt-to-GDP ratio when the expenditure multiplier is lower and vice-versa. The study shed some light on the sources of heterogeneity in a debt–growth relationship. We can conclude that countries with a high expenditure multiplier level can borrow more and sustain growth. In contrast, in countries with a lower expenditure multiplier, a relatively low debt level becomes unsustainable for growth.

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“…Increasing interest rates lead to lower private investment (Sánchez-Juárez and García-Almada 2016; Huang et al 2020). Priftis and Zimic (2021) find that the direction of financing public spending defines which effect on private investment can be expected: crowding-out or crowding-in. Investments are crowded-in when government spending is financed abroad.…”

Section: Expenditure Multiplier As An Explanatory Factor Of the Heterogeneity In The Debt-growth Relationshipmentioning

confidence: 99%

Empirical Evidence on Factors Conditioning the Turning Point of the Public Debt–Growth Relationship

et al. 2021

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This paper contributes to the limited literature on the factors conditioning the turning point of the public debt–growth relationship. A decade after the global financial crisis, when the debt ratio in many countries was still above pre-crisis levels, the COVID-19 pandemic again increased the pressure on public finances. It revived the debate on the ability to promote economic recovery through debt-financed government expenditure. However, more intense government borrowing increases its costs and uncertainty about future taxation policy, thus potentially disturbing private consumption, investment, and economic growth. In this paper, we estimate the thresholds of indicators on which the expenditure multiplier depends, which may already imply a risk that public debt will dampen economic growth. We use a methodology of structural threshold regression to examine the varying effects that debt might have on growth using consumption, investment, taxes, and imports as threshold variables, as well as several other factors suggested by previous contributions. The applied methodology allows for the addressing of parameter heterogeneity and endogeneity to be accounted for at the same time. The main results suggest that a positive debt effect is more likely if the conditions for a high expenditure multiplier are met, that an increase in the public-debt-to-GDP ratio is not necessarily deleterious to growth if shares of private consumption and investment in GDP are high, while the tax-revenue-to-GDP ratio is low.

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Sources of Borrowing and Fiscal Multipliers

Cited by 10 publications

References 54 publications

Saving Constraints, Debt, and the Credit Market Response to Fiscal Stimulus

Saving Constraints, Debt, and the Credit Market Response to Fiscal Stimulus

The Heterogeneous Public Debt–Growth Relationship: The Role of the Expenditure Multiplier

Empirical Evidence on Factors Conditioning the Turning Point of the Public Debt–Growth Relationship

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