Morteza Ghomi, Jochen Mankart, Rigas Oikonomou, Romanos Priftis<\/p>\n\n\n\n
Government spending effectiveness depends critically on how it is financed. Using state dependent SVAR models and local projections on post-war US data, we show that fiscal expansions financed with short-term debt generate significantly larger output multipliers than those financed with long-term debt. This difference mainly stems from private consumption responses: short-term financing crowds in consumption while long-term financing does not. Torationalize this finding, we construct an incomplete markets model in which households invest in short-term and long-term assets. Short assets provide liquidity\/safety services; households can (more readily) use them to cover sudden idiosyncratic spending needs. An increase in the supply of these assets, through a short-term debt-financed government expenditure shock, boosts 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 fiscal multipliers differ substantially across financing modes, with short-term-financed shocks typically exceeding unity while long-term-financed shocks typically fall below unity. We show these differences persist across monetary and fiscal policy regimes, with important implications for optimal debt management and stimulus design. \u03a0\u03b7\u03b3\u03ae: ECB<\/p>\n\n\n\n
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