Debt maturity and government spending multipliers (European Central Bank)

Summary

• Empirical analysis of post-war US data demonstrates that government spending shocks financed with short-term debt yield significantly higher output multipliers than those financed with long-term debt, typically exceeding unity under short-term financing.p.2
• The divergence in output multipliers is primarily driven by consumption crowding-in: short-term financing generates a consumption multiplier of 1.16 on impact, while long-term financing yields -0.03.p.12
• The quantitative model matches empirical term spread sensitivity, calibrated to a steady-state debt-to-GDP ratio of 60 percent annually and an average long-term bond maturity of 25 quarters.p.31
• In the baseline calibrated New Keynesian model with an inertial monetary policy rule, short-term debt financing yields an impact multiplier of 2.0, whereas long-term debt financing produces an impact multiplier of 0.5.p.33

Key insights

1. Fiscal expansions financed with short-term debt generate larger output multipliers than those financed with long-term debt across multiple econometric frameworks.p.2
2. The disparity between financing modes is driven by private consumption responses rather than private investment.p.12
3. Short-term government bonds provide liquidity and safety services to households facing idiosyncratic expenditure shocks under incomplete markets.p.4
4. Controlling for private sector wages, government debt, GDP deflator, overnight rate, and term premium confirms the persistence of short-term multiplier advantages.p.14
5. Under an inertial monetary policy rule, short-term debt issuance acts as an expansionary demand shock in the Euler equation that amplifies household consumption.p.33
6. While a standard Taylor rule reduces overall output multipliers by raising real interest rates, short-term financing continues to generate larger multipliers than long-term financing.p.30
7. In an unbacked fiscal regime with passive monetary policy, spending multipliers become larger due to volatility amplification via the consolidated budget constraint.p.35
8. Allowing long-term bonds to provide partial liquidity services narrows but preserves the positive gap between short-term and long-term debt-financed multipliers.p.37