Fiscal Multipliers and the Maturity Financing of Government Spending Shocks
with Jochen Mankart, Rigas Oikonomou, and Romanos Priftis
This paper shows that debt-financed fiscal multipliers vary depending on the maturity of debt issued to finance spending. Utilizing state-dependent SVAR models and local projections for post-war US data, we show that a fiscal expansion financed with short-term debt increases output more than one financed with long-term debt. The reason for this result is that only the former leads to a significant increase in private consumption. To rationalize this finding, we construct an incomplete markets model in which households invest in long- and short-term assets. Short assets provide liquidity services; households can use them to cover sudden spending needs. An increase in the supply of these assets, through a short-term debt financed government expenditure shock, makes it easier for constrained households to meet their spending needs and crowds in private consumption. We first show this mechanism analytically in a simplified model, and then quantify it in a carefully calibrated New Keynesian model. We find that differences in fiscal multipliers across short-term and long-term financed shocks can be large. We explore how these differences are influenced by the monetary and fiscal policy rules..