Fiscal multipliers and foreign holdings of public debt.
Date: 2020-06-03
Institutions: European Central Bank
Subjects: economic integration, financial market, fiscal policy, international finance, macroeconomics, public debt

Working Paper Series 

Fernando Broner, Daragh Clancy, 
Aitor Erce, Alberto Martín 

Fiscal multipliers and foreign holdings 
of public debt 

No 2255 / March 2019 

Disclaimer: This paper should not be reported as representing the views of the European Central Bank 
(ECB). The views expressed are those of the authors and do not necessarily reflect those of the ECB. 

Abstract

This paper explores a natural connection between ﬁscal multipliers and foreign holdings of

public debt. Although ﬁscal expansions can raise domestic economic activity through various

channels, they can also have crowding-out eﬀects if the resources used to acquire public debt

reduce domestic consumption and investment. These crowding-out eﬀects are likely to be weaker

when governments have access to foreign markets to place their debt, increasing the size of

multipliers. We test this hypothesis on (i) post-war US data and (ii) data for a panel of 17

advanced economies from the 1980’s to the present. To do so, we assemble a novel database of

public debt holdings by domestic and foreign creditors for a large set of advanced economies.

We combine this data with standard measures of ﬁscal policy shocks and show that, indeed, the

size of ﬁscal multipliers is increasing in the share of public debt held by foreigners. In particular,

the ﬁscal multiplier is smaller than one when the foreign share is low, such as in the U.S. in the

1950’s and 1960’s and Japan today, and larger than one when the foreign share is high, such as

in the U.S. and Ireland today.

Keywords: sovereign debt, ﬁscal multiplier, foreign holdings of public debt.

JEL Classiﬁcation: E62, F32, F34, F36, F41, F62, F65, G15, H63

ECB Working Paper Series No 2255 / March 201911 Introduction

In the aftermath of the ﬁnancial crisis, ﬁscal policy has taken center stage in the macroeconomic

debate. Ten years after the start of the crisis, most advanced economies have yet to recover fully

from its eﬀects while traditional monetary policy has lost its eﬀectiveness as nominal interest rates

are close to zero. While many of these countries initially responded to the crisis with ﬁscal stimuli,

several of them have since implemented strict austerity measures. This has motivated a new wave

of empirical research on the eﬀects of ﬁscal policy, particularly on the size of ﬁscal multipliers.1

At the same time, most advanced economies experienced a sharp increase in public debt as

they faced deep recessions and costly ﬁnancial bailouts. The rise of public debt was accompanied

by two key developments, especially in the Euro periphery: a re-evaluation of sovereign default

risk and a decline in the share of public debt held by foreigners, as the increase in public debt

was predominantly absorbed by domestic banks. Since then, a growing literature has sought to

understand the determinants and macroeconomic consequences of the distribution of public debt

between domestics and foreigners.2

In this paper, we argue that there is a natural connection between ﬁscal multipliers and the

foreign holdings of public debt. The intuition is simple. There are various channels through which

ﬁscal expansions, either increases in public spending or reductions in taxes, can raise domestic

economic activity.3 But ﬁscal expansions can also have crowding-out eﬀects on the domestic private

sector. Probably the most important among the latter is that the resources used by the domestic

private sector to acquire public debt can detract from consumption and investment. This implies

that the crowding-out eﬀect of ﬁscal expansions is likely to be stronger when they are ﬁnanced

by selling public debt to domestic (as opposed to foreign) residents, except in the extreme case

in which domestic residents can fully ﬁnance these purchases from foreign sources (i.e. by selling

foreign assets or by borrowing from foreigners).

Our main result is that, consistent with the previous argument, the estimated size of ﬁscal

multipliers is increasing in the share of public debt that is in the hands of foreigners. This result

holds both for the United States during the postwar period, and for a panel of advanced (OECD)

economies over the last few decades. According to our estimates the public spending multiplier

in the United States was signiﬁcantly smaller than one in the 1950s, when the foreign share was

1See Ramey (2016) for a recent survey.
2Arsanalp and Tsuda (2012), Broner, Erce, Martin and Ventura (2014) and Brutti and Saur`e (2016) provide

accounts of public debt developments during the European crisis.

3For a review of these channels, see Ramey (2011a).

ECB Working Paper Series No 2255 / March 20192less than 5%, and signiﬁcantly greater than one in 2014, when the foreign share was close to 50%.

Consistently, the estimated deﬁcit multiplier in our sample of OECD economies also depends on

the foreign share. In particular, it is smaller than one for low levels of foreign share, such as Japan’s

8%, and is above one for high levels of foreign share, such as Ireland’s 64%.

We obtain these results by following existing methodologies, both regarding the identiﬁcation of

ﬁscal shocks and the empirical speciﬁcations used to estimate their eﬀects. Regarding ﬁscal shocks

we use two alternative approaches: (i) Ramey and Zubairy’s (2018) data on shocks to government

spending in the United States, and Guajardo et al.’s (2014) data on ﬁscal consolidations in a group

of OECD economies, both of which are based on the narrative approach, and; (ii) for the case of

the United States, we also estimate shocks to government spending by using the structural VAR

approach of Blanchard and Perotti (2002). Regarding the empirical methodology used to estimate

multipliers, we follow Ramey and Zubairy’s (2018) two-step procedure. First, we use the ﬁscal

shocks described above to instrument the ﬁscal variable of interest, i.e., government spending or

public deﬁcit shocks. Second, we use this instrumented ﬁscal variable to estimate the corresponding

multiplier. In both steps we use Jord`a’s (2005) local projection method.

We ﬁrst use these methodologies to estimate baseline, unconditional, multipliers. We then in-

corporate our measures of foreign debt holdings to estimate conditional multipliers. For the case,

of the United States, data on public debt holdings by foreign residents is available, at a quarterly

frequency starting in 1950, from the Federal Reserve Economic Databank (FRED). For the case of

17 OECD economies, we have constructed a novel annual dataset of the allocation of public debt

between domestic and foreign holders. This data has been assembled from a variety of sources,

including the Balance of Payments (Financial Accounts, International Investment Positions), Mon-

etary Surveys and data provided to us directly by our sample countries’ Central Banks, Ministries

of Finance and Statistical Oﬃces.

Our data on foreign holdings of public debt reveals interesting patterns. First of all, there is

signiﬁcant variation across countries: in some countries, such as Canada and Japan, the share of

public debt held by foreigners is consistently low, whereas in others, such as Finland and Austria,

foreigners hold more than 75% of public debt towards the end of the sample. Over time, in line

with the rise of ﬁnancial globalization, the general pattern is one of increasing public debt in the

hands of foreigners. In the United States, for instance, the share of public debt held by foreigners

has increased from less than 5% in the 1950s to close to 50% today. Although this general increase

has been observed across most OECD economies throughout our sample, it has not been systematic

ECB Working Paper Series No 2255 / March 20193over time. During the recent European debt crisis, for instance, there was a sharp decline in the

share of debt held by foreigners in the euro periphery.

To ﬁx ideas, we develop a simple model that illustrates how the size of ﬁscal multipliers depends

on the marginal foreign share of public debt holdings, i.e., on whether the change in public debt

brought about by a ﬁscal shock is absorbed by domestic or by foreign residents. Testing this

empirically, however, is diﬃcult because the marginal foreign share is not directly observable. One

possibility would be to estimate it based on the correlation between changes in foreign holdings of

public debt and changes in total public debt over a window of time following ﬁscal shocks. But

in this case it would be hard to establish causality, because observed changes in foreign holdings

are likely endogenous to ex-post economic conditions. Thus, we need an ex-ante measure of foreign

share that is determined prior to the realization of the ﬁscal shock.4

We ﬁnd that the average foreign share, i.e., the share of public debt held by foreigners before

a ﬁscal shock, provides such a measure. Speciﬁcally, we establish that the average foreign share

at the time of a ﬁscal shock is a good predictor of the marginal foreign share. By including this

measure of the foreign share in our regressions, we ﬁnd that the estimated size of ﬁscal multipliers

is increasing in the share of public debt that is in the hands of foreigners. This results holds for

the spending multiplier estimated for the United States and for the deﬁcit multiplier estimated for

our sample of OECD economies.

These ﬁndings challenge the conventional wisdom on ﬁscal multipliers in open economies. The

common perception, inspired by the traditional Mundell-Fleming model, is that such multipliers

are smaller in open economies because part of the eﬀect of ﬁscal expansions on aggregate demand

falls on foreign goods.5 Our ﬁndings instead point to an alternative interpretation of this inﬂow

of foreign goods: namely, they reﬂect capital inﬂows, which help ﬁnance ﬁscal expansions thereby

minimizing their crowding-out eﬀects on domestic investment.

In a similar vein, the common

perception is that there are positive spillovers of a ﬁscal expansion by any one country, precisely

because it raises its demand for foreign goods. Our ﬁndings instead point to a potentially negative

spillover: to the extent that ﬁscal expansions are ﬁnanced via foreign borrowing, their crowding-out

eﬀects are exported and consumption and investment are reduced elsewhere.

4For example, consider a ﬁscal expansion that leads to higher economic growth for reasons unrelated to the foreign
share of public debt holdings. If this higher growth then results in an increase in foreign purchases of public debt,
we would be classifying the event as having a high marginal foreign share. But it would be the expansionary eﬀect
of the ﬁscal shock that causes the high foreign share, and not the other way around.

5For empirical evidence on the relationship between multipliers and trade, see Corsetti et al. (2012), Ilzetzki et

al. (2013), and Cacciatore and Traum (2018).

ECB Working Paper Series No 2255 / March 20194Literature review:

Our paper is closely related to two strands of literature. The ﬁrst one is the literature on the

eﬀects of ﬁscal policy, which has grown signiﬁcantly in recent years. On the empirical side, and in

the wake of the ﬁnancial crisis, much of this work has argued that ﬁscal multipliers appeared to

be larger than what we previously thought (e.g. Acconcia et al. 2013, Blanchard and Leigh 2013,

Mertens and Ravn 2013). Recent work has also argued that multipliers are state contingent, being

relatively large during recessions (e.g. Auerbach and Gorodnichenko 2012) and at the zero lower

bound (e.g. Christiano et al. 2011 and Miyamoto et al. 2018). These ﬁndings have been partially

challenged, though. Alesina and Ardagna (2013) for instance, argue that ﬁscal contractions can

actually be expansionary.6 Ramey and Zubairy (2018), in turn, question the state-contingency of

estimated multipliers.

Recently, the literature has emphasized that the eﬀects of ﬁscal policy depend crucially on

whether governments have access to foreign markets to place their debt. This point has been

made theoretically by Broner et al. (2014), Priftis and Zimic (2015, 2018), and Farhi and Werning

(2017).7 Of these, Priftis and Zimic (2018) is closest to us as they also explore this issue empirically.

Our work diﬀers from theirs in terms of both methodology and scope, however. First, they rely on

an SVAR approach to identify ﬁscal shocks, whereas we build on the narrative approach. Second,

they use ex-post changes in public debt holdings while we condition ﬁscal shocks on the ex-ante

foreign share of public debt. In our view, as explained above, using ex-ante data makes the analysis

less subject to endogeneity biases. It also has an advantage for policy purposes because it helps

predict the eﬀect of ﬁscal shocks. Third, we have extended substantially existing international

datasets on foreign and domestic holdings of public debt.

Our paper is also related to the literature on the eﬀects of public debt. The idea that public

debt can crowd out private investment and that the extent of this crowding out depends on whether

the private sector is ﬁnancially constrained is of course very old (e.g. Diamond 1965 and Barro

1974). More recently, the literature has studied the connection between debt sustainability and the

distribution of public debt holdings between domestic and foreign residents. One set of papers has

emphasized the stabilizing role of domestic debt holdings ex ante, which raise incentives for debt

repayment (e.g., Guembel and Sussman 2009, Broner and Ventura 2011, Gennaioli et al. 2014, and

6The crowding-out eﬀects emphasized in this paper are one potential reason why ﬁscal contractions may be

expansionary, especially when governments rely heavily on domestic ﬁnancial markets.

7In a related vein, Caballero et al. (2016) and Sin (2016) argue that if the increase in safe/liquid assets associated
with ﬁscal expansions is absorbed by foreigners their associated beneﬁts on the domestic economy might be smaller,
leading to smaller multipliers.

ECB Working Paper Series No 2255 / March 20195Chari et al. 2016). Another set of papers has instead emphasized the de-stabilizing role of domestic

debt holdings ex post, which might generate feedback loops between the public and private sectors

in times of crisis (e.g. Acharya et al. 2014, Farhi and Tirole 2016).8

The paper is structured as follows. Section 2 describes the dataset that we use for the United

States. Section 3 develops a simple model to explain the basic connection between the ﬁscal

multiplier and foreign holdings of public debt. Section 4 and 5 respectively describe our empirical

methodology and our main results for the United States. Sections 6 and 7 do the same for our

panel of OECD economies. Finally, Section 8 concludes.

2 Data

We analyze how the foreign share of public debt holdings relates to the ﬁscal multiplier in the

United States during the postwar period. There are two key empirical challenges for our analysis:

measuring the distribution of public debt holdings between foreign and domestic residents, and

identifying ﬁscal shocks. We next explain how we address these issues.

2.1 Public debt holdings

We obtained quarterly data on U.S. public debt holdings by foreign residents from 1950 from the

Federal Reserve Economic Databank (FRED). We highlight some of the key features of the data

here, with the full details contained in Appendix A.

Figure 1 shows the time evolution of the foreign share for the US. The ﬁgure shows that during

the Bretton Woods period the share of public debt in foreign hands was low, about 5%. The foreign

share increased sharply after the collapse of Bretton Woods in the early 1970s, and then hovered

around 20% until the mid 1990s. Since then, the foreign share has increased steadily until reaching

50% today.

8A related literature has focused on the role of foreign investors in determining sovereign yields. Bernanke,
Reinhart and Sack (2004), Wu (2005) and Warnock and Warnock (2009), for instance, provide evidence that treasury
purchases by foreign creditors reduce long-term yields.

[INSERT FIGURE 1]

ECB Working Paper Series No 2255 / March 201962.2 Fiscal shocks

Changes in ﬁscal policy are in general endogenous to current and expected economic conditions,

making it diﬃcult to identify truly exogenous ﬁscal shocks. The literature proposes two ways of

overcoming this diﬃculty. The ﬁrst is the narrative approach, which identiﬁes exogenous shocks

to ﬁscal variables from oﬃcial documents by selecting policy announcements driven by factors

other than current economic conditions. The second strategy identiﬁes exogenous shocks to ﬁscal

variables as the diﬀerence between observed levels and those predicted by estimated ﬁscal rules.

We now brieﬂy explain each of these approaches.

We use the narrative shocks to U.S. government spending provided by Ramey and Zubairy

(2018), who build on Ramey’s (2011b) defense news series. This series consists of news from

magazines and newspapers on changes in U.S. government defense spending. Crucially, the series

includes changes in spending linked to political and military events and not to the state of the

economy. The ﬁscal shock magnitudes reﬂect changes to the expected present discounted value of

government spending. We depict the resulting defense news shocks in Figure 2 and display their

summary statistics in Table 1.

One can also identify innovations to ﬁscal variables as the diﬀerence between their realized

values and those predicted using either structural VARs or ﬁscal rules. These methodologies use

the identifying assumption that ﬁscal variables do not respond contemporaneously to shocks to

their macroeconomic determinants.9 This seems reasonable for government spending, since it does

not respond automatically to the state of the economy and its discretionary component is subject

to decision and implementation lags. This is not the case for other components of the ﬁscal balance.

Government investment is highly cyclical and taxes and transfers have large automatic components.

The use of quarterly, rather than annual, data makes satisfying this identifying assumption more

likely.

We also estimate shocks to government spending using the structural VAR approach of Blan-

chard and Perotti (2002). Consistent with Ramey and Zubairy (2018), we only include lagged

values of government spending and GDP as macroeconomic determinants. Figure 2 displays the

resulting estimated ﬁscal shocks, with the summary statistics included in Table 1.

We combine the identiﬁed ﬁscal shocks with our data on public debt holdings to assess the

empirical relation between the foreign share of public debt and the size of ﬁscal multipliers. Before

9Auerbach and Gorodnichenko (2012) use lagged expert forecasts to eliminate the predictable component of ﬁscal

spending innovations. We chose not to do this because experts’ forecasts do not cover all of our sample.

ECB Working Paper Series No 2255 / March 20197doing so, we present a simple model to demonstrate the mechanisms at play.

[INSERT FIGURE 2]

[INSERT TABLE 1]

3 A stylized model of multipliers and sovereign debt

We develop a simple model to illustrate how the foreign share of public debt holdings aﬀects the

size of the ﬁscal multiplier. The goal of the model is to highlight the main economic forces at work,

and to provide a conceptual context for our empirical strategy.

3.1 Preferences and technology

Consider a small-open economy populated by a representative agent of mass one and a government.

There are two periods, t

0, 1

}

∈ {

. There is a single good that can be used for consumption and

investment. Agents only consume at t = 1 and there is no uncertainty, so utility is given by

U0 = C1.

(1)

There are private and government production technologies. The agent receives an endowment

of E0 units of the good at t = 0. If she invests K at t = 0 she produces

Y P
1 = F (K)

(2)

at t = 1, where F (cid:48)(

) > 0 and F (cid:48)(cid:48)(

·

·

invests G at t = 0 it produces

) < 0. The government receives no endowment at t = 0. If it

Y G
1 = γ

G

·

(3)

at t = 1.10

3.2 Financial markets

The representative agent and the government trade bonds among themselves and with an interna-

tional ﬁnancial market that is large and is willing to borrow and lend at a (gross) return of one.

10We assume that there are decreasing returns to scale in the private technology to ensure an interior solution. We

assume that there are constant returns to scale in the public technology only to simplify the notation.

ECB Working Paper Series No 2255 / March 20198As a result, the equilibrium interest rate is

R = 1.

(4)

The representative agent can borrow and lend from the international ﬁnancial market, but she

can only pledge a fraction λ of her capital and of her public bond holdings. As a result, she faces

the credit constraint

B∗

λ

≥ −

·

(cid:0)K + BH (cid:1) ,

(5)

where B∗ and BH are holdings of international and government bonds respectively, where B∗ < 0

implies borrowing from the international ﬁnancial market. Thus, Equation (??) says that borrowing

from foreigners cannot exceed the net present value of pledgeable funds. Since these funds are known

during youth, the credit obtained by the private sector is riskless. The private budget constraints

at t = 0 and t = 1 are

K + BH + B∗ = E0 and C1 = Y P

1 + BH + B∗ + Y G

1 −

T1,

(6)

where T1 are taxes at t = 1. We assume taxes are zero at t = 0.

The government also borrows in order to invest at t = 0. Since taxes are zero at t = 0, the

government’s budget constraints at t = 0 and t = 1 are

G = B and B = T1.

(7)

We assume that a fraction θ of bonds issued by the government are purchased by the interna-

tional ﬁnancial market, so

BF = θ

·

B and BH = (1

θ)

·

−

B.

(8)

We take the “foreign share”θ as exogenous in this simple model, but there is a growing literature

on the determinants of public debt holdings. Broadly speaking, there are two opposing forces at

work. On the one hand, risk diversiﬁcation pushes agents away from holding too many domestic

government bonds. On the other, there are forces that push in the opposite direction, such as favored

treatment of domestic agents in case of default, ﬁnancial repression, macroprudential regulation,

ECB Working Paper Series No 2255 / March 20199asymmetric information, costs of buying foreign assets, and capital controls.11,12 In any case, we

are not concerned with the source of foreign share here, but rather on its eﬀect on the size of the

ﬁscal multiplier.

3.3 Equilibrium and the ﬁscal multiplier

Under these assumptions, it is straightforward to show that the representative agent solves

max
K

F (K)

−

K + E0 + Y G

1 −

T1

(9)

s.t. K

E0

−

≤

1

BH ,

λ −

taking Y G

1 , T1, and BH as given. The ﬁrst term in the constraint is the maximum amount of
resources that the agent can invest in capital and government bonds. It equals the endowment

times a ﬁnancial multiplier, which is increasing in the pledgeability of investments λ.13

If the

constraint is not binding, private investment is such that the return to capital is equal to the

international interest rate (i.e. one). Thus,

K = min

(cid:26) E0
1

−

λ −

(cid:27)

BH , K∗

(10)

where F (cid:48) (K∗)

1.

≡

Total output at t = 1 is therefore

Y = Y P + Y G = F

(cid:18)

min

(cid:26) E0
1

−

(cid:27)(cid:19)

(1

θ)

·

−

λ −

B, K∗

+ γ

B.

·

(11)

11Broner et al. (2014), for instance, highlight the role of discrimination to account for the reduction in the foreign
share of public debt holdings during the recent European crisis. Reinhart and Sbrancia (2015) document the use of
ﬁnancial repression to deal with public debt in the postwar period.

12To see how ﬁnancial repression can be useful, consider a simple extension of our model in which the government
is benevolent and it can choose to default on its debt in period 1. Suppose, moreover, that there are no costs to
defaulting on foreigners but each unit that is defaulted on a domestic agent generates a cost of κ. In this case, the
government repays its debt in equilibrium if and only if

κ · (1 − θ) · b ≥ θ · b ⇔ θ ≤

1
1 + κ

.

This condition is very intuitive: the larger is the cost of defaulting on domestic agents, the lower is the amount of
debt that they must hold to make repayment credible.

Of course, the representative agent does not internalize the eﬀects of its debt holdings on enforcement, and will
not willingly hold public debt as long as she is constrained. In this case, we can thus interpret 1 − θ as a “ﬁnancial
repression” threshold, which determines the minimum amount of domestic public debt that the representative is
forced to hold by regulation. See Chari et al. (2016) for a related model.

13This expression is particularly simple because we assume that capital and government bonds are equally pledge-

able. Our results are robust as long as neither capital nor government bonds are fully pledgeable.

ECB Working Paper Series No 2255 / March 201910To calculate the ﬁscal multiplier we take the derivative of output Y with respect to either govern-

ment spending G or the deﬁcit B.14 Assuming that the credit constraint is binding, i.e., K < K∗,

the multiplier equals

M

≡

dY
dG

=

dY
dB

= γ

(1

θ)

·

−

−

F (cid:48) (k) .

(12)

When the credit constraint is binding the multiplier has two terms. The ﬁrst term, which is positive,

is the direct eﬀect of an increase in public spending on public output. The second term, which is

negative, is the ﬁnancial crowding-out eﬀect. As long as θ < 1, part of the increase in public debt

is absorbed by the private sector, which crowds out private investment. This eﬀect is decreasing

in foreign share θ and is the crucial element of our story. To sum up, a higher foreign share θ is

associated with a higher ﬁscal multiplier. This is what we want to test in the empirical section.

3.4 Foreign demand for public debt: A discussion

Before turning to the empirical analysis, there is one question we need to address: what is the

empirical counterpart to the foreign share θ? In the model, θ is equal to both the average foreign

share, i.e. BF

t /Bt, and the marginal foreign share, i.e. dBF

t /dBt. In practice, this need not be the
case. If they are diﬀerent, it should be the marginal share that matters for the ﬁscal multiplier.15

That is, we would like to compare ﬁscal expansions that cause a large increase foreign holdings of

public debt (i.e., high dBF

t /dBt) to those that do not (i.e., low dBF

t /dBt).

In practice, however, we cannot directly observe the marginal foreign share. One possibility

would be to estimate it based on the correlation between changes in foreign holdings of public

debt and changes in total debt over a window of time following ﬁscal shocks. But in this case

it would be hard to establish causality, because observed changes in foreign holdings are likely

endogenous to ex-post economic conditions. For example, consider a ﬁscal expansion that leads to

higher economic growth for reasons unrelated to the foreign share in public debt holdings. If this

higher growth then results in an increase in foreign purchases of public debt, we would be classifying

the event as having a high marginal foreign share. But it would be the expansionary eﬀect of the

ﬁscal shock that causes the high foreign share, and not the other way around.16 In other words,

14The two multipliers are the same in this model because of the assumption that current taxes T0 are constant.
Our results always hold for dY /dB. They also hold for dY /dG as long as dT /dG < 1, i.e. as long increases in G lead
to increases in B.

t = 0 so that the average foreign share equals zero, a ﬁscal expansion will have no

15For example, even if BF

crowding-out eﬀects if dBF

t /dBt = 1.

16This concern is especially relevant given the positive correlation between economic conditions and foreign holdings
of domestic assets in the data. For evidence of this correlation, see Broner et al. (2013) and, for the case of public

ECB Working Paper Series No 2255 / March 201911a positive correlation between eﬀectiveness of expansions and ex-post foreign share can be due to

reverse causality. Thus, we need an ex-ante measure of foreign share that is determined prior to

the realization of the ﬁscal shock.

As it turns out, the ex-ante average foreign share BF
t
−

1/Bt

−

1 is both directly observable and a

very good proxy for the marginal foreign share. To see this, we run the following regression,

∆BF

t = β1 + β2 ·

∆Bt + β3 ·

Xt

1 + β4 ·

−

Xt

1 ·

−

∆Bt + υt,

(13)

1/Bt

1 = BF
t
−

1 denotes the average foreign share, ∆BF

where Xt
Bt −
OECD economies we analyze in Section ??. The table shows that the estimated coeﬃcient on the

−
1. The regression results are in Table 2, both for the U.S. and for the cross-section of

1, and ∆Bt =

t = BF

BF
t
−

t −

Bt

−

−

interaction Xt

1 ·

−

∆Bt is statistically signiﬁcant and close to one. This means that the ex-ante

average foreign share is indeed a good proxy for the marginal foreign share. Given this result, from

now on whenever we speak of the foreign share we will refer to the ex-ante average foreign share,

understanding that it is a proxy for the (unobserved) marginal foreign share.17

[INSERT TABLE 2]

4 Empirical Methodology

We now address the main objective of our paper and analyze how the distribution of public debt

holdings aﬀects the size of ﬁscal multipliers. Our empirical methodology follows the approach

introduced by Ramey and Zubairy (2018), which conceptually consists of two steps. First, we

use both ﬁscal shocks described above to instrument cumulative shocks to the ﬁscal variable of

interest.18 Second, we estimate the eﬀects of these instrumented ﬁscal shocks on cumulative output.

The use of cumulative shocks and output allows for a direct interpretation of the IV eﬀects as ﬁscal

multipliers. In both steps we use Jord`a’s (2005) local projection method.

We begin by estimating a baseline speciﬁcation to obtain unconditional multipliers. We then

incorporate our measures of foreign share to estimate conditional multipliers.

debt in the context of the recent European crisis, Broner et al. (2014).

17Our result that the average foreign share is a good predictor of the marginal share is consistent with the results

on average and marginal international portfolios in Kraay and Ventura (2000).

18As Ramey and Zubairy (2018) show, both instruments are necessary since, individually, they are not strong

enough in the ﬁrst stage.

ECB Working Paper Series No 2255 / March 2019124.1 Baseline speciﬁcation

We use both the defense news shocks and the residuals from the structural VAR to instrument for

the cumulative sum of real government spending between t + 1 and t + h, where h is the horizon of

the multiplier:

h
(cid:88)

j=1

gt+j = αh + βN
h ·

t + βV
(cid:15)N

h ·

t + φ1
(cid:15)V

h(L)

Zt

−

·

1 + υt,h,

(14)

where (cid:15)N

t and (cid:15)V

t are the two ﬁscal shocks and Zt

1 is a vector of controls that includes lags of GDP

−
and of both ﬁscal shocks. Since our data is quarterly, we also include seasonal dummies. Finally,

we scale all variables by potential GDP, computed as HP-ﬁltered real GDP.19

This allows us to obtain an instrumented measure of the cumulative sum of government spend-

ing,

Gt,h ≡

αh + βN
h ·

t + βV
(cid:15)N

h ·

t + φ1
(cid:15)V

h(L)

Zt

1.

−

·

Finally, we regress the cumulative sum of real output between t + 1 and t + h on Gt,h:

h
(cid:88)

j=1

yt+j = αh + βG
h ·

Gt,h + φG

h (L)

Zt

−

·

1 + υt,h,

where the multiplier at horizon h is given by

mh ≡

βG
h ,

(15)

(16)

(17)

i.e., mh measures the derivative of the cumulative change in output during the h periods following

a ﬁscal shock, with respect to the same-period cumulative change in government spending. In other

words, the cumulative multiplier at horizon h is deﬁned as the integral of the output response over

h periods divided by the integral of government spending over the same h periods following the

initial shock.20

4.2 Foreign share of public debt

To assess how public debt holdings aﬀect the size of ﬁscal multipliers, we add an interaction term

between the instrumented ﬁscal shock and the foreign share. As we have already commented,

19We set the λ-parameter in the HP ﬁlter to 25600. This leads to a similar series for potential GDP as the 6th
degree polynomial method employed by Ramey and Zubairy (2018). Our results are unaﬀected by the choice of
method used to estimate potential output.

20See also Mountford and Uhlig (2009), Uhlig (2010), and Fisher and Peters (2010).

ECB Working Paper Series No 2255 / March 201913the foreign share is in turn proxied through the lag of the average foreign share, which is a good

predictor of the marginal share. Formally, the foreign share Xt

1 is deﬁned as

−

Xt

−

1 =

1

,

(18)

DF
t
−
Dt

−

1

where Dt

1 is the total stock of public debt and DF
t
−

−

Formally, the ﬁrst-stage regressions are now

1 is public debt held by foreigners.

h
(cid:88)

j=1

gt+j = αh + βN
h ·

t + βN X
(cid:15)N

h

(cid:15)N
t

·

Xt

−

·

1 + βV

h ·

t + βV X
(cid:15)V

h

(cid:15)V
t

·

Xt

−

1+

·

(19)

βX
h ·

Xt

−

1 + φG

h (L)

Zt

−

·

1 + φGX

h

(L)

Zt

1 ·

−

Xt

−

·

1 + υt,h,

h
(cid:88)

j=1

gt+j ·

Xt

−

1 = αI

h + βIN
h

t + βIN X
(cid:15)N
h

(cid:15)N
t

·

Xt

−

·

1 + βIV

h ·

t + βIV X
(cid:15)V
h

(cid:15)V
t

·

Xt

−

1+

·

·

(20)

βIX
h

Xt

−

·

1 + φIG

h (L)

Zt

−

·

1 + φIGX
h

(L)

Zt

1 ·

−

Xt

−

·

1 + υI

t,h,

since we need to estimate separately how the ﬁscal shocks and their interaction with foreign share

aﬀect the cumulative sum of government spending and its interaction with foreign share.21 The

instrumented variables are now

Gt,h ≡

αh + βN
h ·

t + βN X
(cid:15)N

h

βX
h ·

Xt

−

1 + φG

h (L)

·

(cid:15)N
t

Xt

1 + βV

t + βV X
(cid:15)V

h

·
Zt

−

·
1 + φGX

h

−

h ·
Zt

·

(L)

Xt

1 ·

−

−

·
1,

(cid:15)V
t

Xt

−

1+

·

(21)

GXt,h ≡

h + βIN
αI
h

βIX
h

Xt

−

·

t + βIN X
(cid:15)N
h

(cid:15)N
t

Xt

1 + βIV

t + βIV X
(cid:15)V
h

·
1 + φIG

h (L)

·
Zt

·
−
1 + φIGX
h

·

−

h ·
Zt

·

(L)

1 ·

−

Xt

1.

−

(cid:15)V
t

·

Xt

−

1+

·

(22)

Finally, we regress the cumulative sum of real output between t + 1 and t + h on Gt,h and GXt,h:

h
(cid:88)

j=1

yt+j = αF

h + βG
h ·

Gt,h + βGX

h

·

GXt,h + βF X

h

Xt

−

1+

·

(23)

φF G
h (L)

Zt

−

·

1 + φF GX
h

(L)

Zt

1 ·

−

Xt

−

·

1 + υF

t,h,

21Diﬀerently from Ramey and Zubairy (2018), we use a continuous variable to separate amongst states.

ECB Working Paper Series No 2255 / March 201914where the multiplier at horizon h is now a function of foreign share and is given by

mh (Xt

1)

−

≡

h + βGX
βG

h

Xt

1.

−

·

(24)

5 Multipliers and the foreign share of public debt

In this section, we run the regressions in Equations (??) and (??) and report the results. We ﬁrst

show that our baseline regressions replicate the results obtained in the literature. We then show

how the size of ﬁscal multipliers depends on the foreign share. We have devoted a signiﬁcant eﬀort

to evaluate the validity of our instruments. Throughout this section, however, we report only the

second-stage results, i.e., the estimates of the multiplier. We relegate all ﬁrst-stage results, which

relate to the eﬀect of ﬁscal shocks on actual spending, to Appendix B. There we also provide details

of the instrument-relevancy tests we conducted.

5.1 Baseline speciﬁcation

Table 3 and Figure 3 respectively show the regression results and the cumulative multipliers that

emerge from our baseline regression.22 Table 3 reports the coeﬃcients βG

≤
up to a two-year horizon, whereas Figure 3 plots the cumulative multipliers for h

h for h

8 quarters, i.e.

16 quarters,

≤

i.e., up to a four-year horizon. In all ﬁgures, we also plot the 90-percent conﬁdence bands.

The estimated multiplier is 0.9 for the ﬁrst quarter before declining to 0.4 after two years. It is

statistically signiﬁcant at the 1% level for the ﬁrst four quarters. These results are in line with the

existing literature. Applying the same methodology to a longer time sample, Ramey and Zubairy

(2018) also report a cumulative multiplier of 0.4 for a two-year horizon.

[INSERT TABLE 3]

[INSERT FIGURE 3]

5.2 Foreign share of public debt

We now turn to our main results on the role of the foreign share, which are obtained by running

the regression in Equation (??). Table 4 reports the estimated coeﬃcients βG

h and βGX

h

for h

8

≤

22Due to the inherent serial correlation in the local projections approach, we use Newey-West standard errors

throughout.

ECB Working Paper Series No 2255 / March 201915quarters, i.e. up to a two-year horizon. The main result is that the interaction coeﬃcient βGX

h

is

statistically signiﬁcant at the 1% level for h

5 quarters and at the 10% level for h

8 quarters.

≤

≤

Figure 4 illustrates the corresponding cumulative multipliers mh (Xt

1) for h

−

≤

16 quarters, i.e.

up to a four-year horizon. Now that the cumulative multipliers depend on the foreign share of public

debt, the ﬁgure contains three panels. The ﬁrst panel plots the cumulative multipliers for a low

foreign share, which corresponds to the 10th percentile of foreign holdings in the sample (Xt

1% =

−

3%). These cumulative multipliers are statistically indistinguishable from zero at all horizons. The

second panel plots the cumulative multiplier for a high foreign share, which corresponds to the

90th percentile of foreign holdings in the sample (Xt

1 = 47% of debt held by foreigners). These

−

cumulative multipliers are statistically diﬀerent from zero at all horizons. The third panel plots the

diﬀerence between the cumulative multipliers for high and low foreign share. The panel illustrates

the results of Table 4 and shows that the regime-dependent multipliers are statistically diﬀerent

from each other.

[INSERT TABLE 4]

[INSERT FIGURE 4]

From an economic standpoint, the eﬀect of the foreign share on the size of the ﬁscal multiplier

is large. For a low foreign share, the point estimate of the multipliers fall relative to those in our

baseline regression. As a result, we can say fairly conﬁdently that they are smaller than one but not

whether they are positive. For a high foreign share, instead, the point estimate of the multipliers

rise relative to those in our baseline regression. Although the standard errors also increase we can

say conﬁdently that they are greater than one for h

7 quarters. Given the observed growth

≤

of foreign share throughout the sample, our results point to a signiﬁcant increase in the ﬁscal

multiplier over time. Figure 5 shows that this is indeed the case.

[INSERT FIGURE 5]

To make sure that our results are not driven by the recent global ﬁnancial crisis, we repeat our

exercise using data only up to 2006.23 Figure 6, which replicates Figure 4 for this subsample, show

that our results remain largely unaﬀected.

[INSERT FIGURE 6]
23Ramey and Zubairy (2018) emphasize the need for suﬃciently long samples to generate informative estimates of
state-dependent multipliers. To ensure our subsample is useful, we conducted the same instrument relevancy tests as
for the full sample (see Appendix B). Our pre-crisis subsample passes these tests and is therefore suitable for use.

ECB Working Paper Series No 2255 / March 2019165.3 Other macroeconomic variables

Our ﬁndings show that the foreign share of public debt holdings has a large eﬀect on the size of

the ﬁscal multiplier. But why is this the case? In the simple model of Section ??, the underlying

narrative was that – relative to the case of a low foreign share – ﬁscal expansions lead to capital

inﬂows and higher investment when the foreign share is high. To see whether this is consistent

with the empirical evidence, we analyze next how diﬀerent macroeconomic variables react to ﬁscal

shocks. In particular, we run diﬀerent versions of the regression in Equation (??) that alternatively

use consumption, investment, and the current account instead of output as the dependent variable.

The resulting cumulative multipliers are respectively depicted in panels (a), (b), and (c) of Figure 7,

which plot these multipliers under a low and a high foreign share, as well as the diﬀerence between

the two.

[INSERT FIGURE 7 (7a, 7b, 7c)]

Taken jointly, these ﬁgures are consistent with the narrative outlined in the model. Panel (a)

shows that, although the point estimates of the cumulative multipliers of consumption are higher

when the foreign share is high, they are still small in absolute terms (0.5 or lower). Moreover, the

diﬀerence between both multipliers is not statistically signiﬁcant at the 10% level, as can be seen

from the third panel in the ﬁgure. Panel (b) shows that the situation is diﬀerent for investment.

Here, the cumulative multiplier is greater when the foreign share is high: on impact, the investment

multiplier is approximately 1.8 for a high foreign share, but it is

0.4 for a low foreign share. The

−

diﬀerence between both is statistically signiﬁcant for h

4 quarters. Finally, panel (c) shows that

≤

foreign debt holdings also appear to matter for the current account. Speciﬁcally, the ﬁgure shows

that the estimated cumulative multiplier on the current account is basically zero when the foreign

share is low, but it is negative when the foreign share is high.

All in all, the three panels of Figure 7 suggest that the higher output multiplier when foreign

share is high is associated with higher levels of investment and capital inﬂows. This is consistent

with the narrative laid out in the model of Section ??. Namely, when foreigners are willing to

purchase domestic government debt, ﬁscal expansions can be ﬁnanced by capital inﬂows and they

do not crowd out domestic investment.

ECB Working Paper Series No 2255 / March 2019175.4

Is it really the foreign share of public debt?

So far we have only considered the foreign share as a possible determinant of the size of the ﬁscal

multiplier. How can we know whether it is actually the foreign share or other, correlated variables,

that drive our results?

We address this question by performing a “race” between alternative explanations. We amend

Equations (??)-(??) to alternatively include a time trend, trade openness, and total public debt as

competing explanatory variables. In each case, we keep the foreign share and its interactions and

add the competing explanatory variable in a symmetric way, i.e. also in levels and interacted with

the ﬁscal shocks.

The results are illustrated in panels (a), (b), and (c) of Figure 8. As these ﬁgures show, the

introduction of these additional variables does not signiﬁcantly alter our ﬁndings: the cumulative

ﬁscal multipliers appear to be closely associated with the foreign share, and the diﬀerence between

the multipliers at high and low levels of foreign shares remains positive and statistically signiﬁcant.

[INSERT FIGURE 8 (8a, 8b, 8c)]

6 Multipliers around the World

To assess the generality of our results for the US, in this section we carry out a similar analysis

for a cross-section of advanced economies. The substantial heterogeneity of foreign public debt

holdings across countries and time in our sample provides a stern test of the importance of foreign

public debt holdings on the size of ﬁscal multipliers. We follow Guajardo et al. (2014) and Jord`a

and Taylor (2016) in using the cyclically-adjusted primary deﬁcit as the ﬁscal variable (instead

of government consumption) and in instrumenting it using announcements of ﬁscal consolidations

applying the narrative approach. In other respects, the empirical methodology follows Ramey and

Zubairy (2018).

We start by describing the data on foreign share of public debt holdings and ﬁscal shocks. We

then explain how we extend the methodology of the previous sections to a panel context. Finally,

we discuss the empirical results. As in the case of the US, we relegate all ﬁrst-stage results to

Appendix D.

ECB Working Paper Series No 2255 / March 2019186.1 Data

We construct a novel dataset of public debt holdings for a large set of advanced economies. We

view the construction of this dataset as an additional contribution of this paper. For shocks to

ﬁscal balances, we use the data on ﬁscal consolidations by Guajardo et al. (2014) and the extension

by Valles and Kataryniuk (2015). For a detailed description of the sources used to construct the

dataset, see Appendix C.

6.1.1 Foreign share of public debt

The data is annual and covers 17 countries. The start of the sample varies by country, ranging

from the late 1970s to the early 1990s. The sample ends in 2014. The countries covered are: Aus-

tralia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan, the

Netherlands, Portugal, Spain, Sweden, the United Kingdom and the United States. It signiﬁcantly

expands the time coverage of the dataset constructed by Arslanalp and Tsuda (2012), who provide

quarterly data for 24 advanced economies, but starting in 2004.

Since we are interested in ﬁscal policy at the consolidated government level, our data is for

General Government Debt. To avoid distortions due to valuation eﬀects, we measure debt at face

value.24 We rely on multiple domestic and international sources to construct this dataset. These

include the Balance of Payments (Financial Accounts, International Investment Positions), Mone-

tary Surveys and data provided to us directly by our sample countries’ Central Banks, Ministries

of Finance and Statistical Oﬃces.

Figure 9 shows our raw data by plotting domestic and foreign holdings of public debt, normalized

by GDP. In the ﬁgure, each observation corresponds to a given country in a given year. The ﬁgure

illustrates that in our sample there is a large variation both in the levels of debt and in their

allocation between domestic and foreign holders. The data ranges from debt levels below 20% to

above 200% of GDP.

Figure 10 shows the evolution of the foreign share for all countries in our sample. A ﬁrst

striking feature is that the foreign share has increased over time in most countries in our sample.

This increase has not been uniform over time though. For example, the countries in the euro

periphery saw a reduction in foreign share after the onset of the sovereign debt crisis in 2009.25

24See Brutti and Saure (2015) for a discussion of potential biases due to price eﬀects.
25For a detailed account of the dynamics of foreign share of public debt during the European debt crisis see Broner

et al. (2014).

ECB Working Paper Series No 2255 / March 201919Figure 10 also shows that there is heterogeneity in foreign share across countries. At one extreme,

Japan has displayed close to 0% foreign share throughout the sample. At the other extreme, several

small countries in the euro area, such as Austria and Finland, have displayed a foreign share above

75% at some point in our sample.

[INSERT FIGURE 9]

[INSERT FIGURE 10]

6.1.2 Fiscal shocks

For shocks to ﬁscal balances, we follow Guajardo et al. (2014) and the extension by Valles and

Kataryniuk (2015). These series are constructed by analyzing contemporaneous policy documents

to identify discretionary ﬁscal consolidations, i.e. changes in tax rates and government spending

that are not motivated by current or prospective economic conditions. The magnitudes of the

shocks reﬂect the expected future budgetary impact of the consolidations.

Using this narrative approach, they identify 230 ﬁscal consolidations for our sample of 17 OECD

economies between 1978 and 2014. The average budgetary impact of these consolidations is -1.1%

of GDP, ranging from 0.8% of GDP (Portugal, 2003) to -6.0% of GDP (Portugal, 2012). A positive

budgetary impact reﬂects the expiration of temporary consolidation measures, e.g. a temporary

reduction in spending that expires. We show the resulting narrative ﬁscal shocks in Figure 11.

[INSERT FIGURE 11]

6.2 Empirical Methodology

The empirical speciﬁcation for the cross-section of advanced economies is similar to the one for the

U.S. There are a few diﬀerences: (i) the ﬁscal variable is the cyclically-adjusted primary deﬁcit

instead of government expenditure; (ii) the instrument is the narrative measure of ﬁscal consoli-

dations instead of announcement of defense spending and VAR residuals; (iii) the data is annual

instead of quarterly; (iv) the regressions are in panels with country and time ﬁxed eﬀects instead

of time series; and (v) following Guajardo et al. (2014) and Jord`a and Taylor (2016) we use the

contemporaneous instrument instead of lagging it one period given that the data is annual.

ECB Working Paper Series No 2255 / March 2019206.3 Results

The baseline results are reported in Table 5 and Figure 12. They both show the coeﬃcients βG

h for

4 years. In the ﬁgure we also plot the 90-percent conﬁdence bands. The estimated cumulative

h

≤

multipliers are around 0.5 and statistically signiﬁcant for horizons of up to 3 years. This is similar

to the multipliers we had found for government spending shocks in our baseline results for the

U.S.26

[INSERT TABLE 5]

[INSERT FIGURE 12]

The results on the role of the foreign share are reported in Table 6 and Figure 13 for h

4 years.

≤

Table 6 shows the coeﬃcients βG

h and βGX

h

. The main result is that the interaction coeﬃcient βGX

h

is statistically signiﬁcant at the 5% level for 2

h

4 years.

≤
Figure 13 illustrates the corresponding cumulative multipliers mh (Xt). Now that the cumulative

≤

multipliers depend on the foreign share of public debt holdings, the ﬁgure contains three panels.

The ﬁrst panel plots the cumulative multipliers for a low foreign share, which corresponds to the

10th percentile of foreign holdings in the sample (Xt% = 6%). These cumulative multipliers are

statistically indistinguishable from zero at all horizons. The second panel plots the cumulative

multiplier for a high foreign share, which corresponds to the 90th percentile of foreign holdings in

the sample (Xt = 66% of debt held by foreigners). These cumulative multipliers are statistically

diﬀerent from zero at all horizons and the point estimates are above one. The third panel plots the

diﬀerence between the cumulative multipliers for high and low foreign share. The panel illustrates

the results of Table 6 and shows that the regime-dependent multipliers are statistically diﬀerent

from each other.

[INSERT TABLE 6]

[INSERT FIGURE 13]

As in the U.S. results, the eﬀect of the foreign share on the size of the ﬁscal multiplier is large.

For low foreign share, we can say fairly conﬁdently that the ﬁscal multipliers are smaller than

one and might even be zero. For high foreign share, instead, the point estimates are above one,

26Note that these results cannot be directly compared to those in Guajardo et al. (2014) and Jord`a and Taylor

(2016) since their methodology provides dynamic output responses as opposed to multipliers.

ECB Working Paper Series No 2255 / March 201921although given the high standard errors we can reject that they are zero but not that they are one.

As examples, these results suggest that in a country with low foreign share like Japan (Xt = 8%)

the multiplier is essentially zero while in a country with high foreign share like Ireland (Xt = 64%)

the multiplier is likely above one.

7 Discussion and concluding remarks

This paper has argued that there is a natural connection between ﬁscal multipliers and the foreign

holdings of public debt.

In particular, the eﬀects of ﬁscal expansions on economic activity are

stronger when they are ﬁnanced with foreign resources. Empirically, the estimated size of ﬁscal

multipliers is increasing in the share of public debt that is in the hands of foreigners. This result

holds both for the United States during the postwar period, and for a panel of advanced (OECD)

economies over the last few decades. In both cases, the estimated multiplier is larger than one in

periods and countries with a high foreign share of public debt holdings, and is smaller than one in

periods and countries with a low foreign share.

These ﬁndings have important implications for the way we think about ﬁscal policy in open

economies. First, they challenge the conventional Mundell-Fleming view by highlighting one chan-

nel through which openness raises ﬁscal multipliers. Namely, capital inﬂows help ﬁnance ﬁscal

expansions thereby minimizing their crowding-out eﬀects on domestic investment.

In a similar

vein, they challenge the common perception that, by raising demand for foreign goods, ﬁscal ex-

pansions by any one country generate positive spillovers for other countries. Our ﬁndings instead

point to a potentially negative spillover: to the extent that ﬁscal expansions are ﬁnanced via foreign

borrowing, their crowding-out eﬀects are exported and consumption and investment are reduced

elsewhere. More broadly, they suggest that the eﬀects of ﬁscal expansions in a globalized world

depend crucially on how they are ﬁnanced.

References

[1] Acconcia, A., Corsetti, G., and Simonelli, S. (2014). “Maﬁa and Public Spending: Evidence

on the Fiscal Multiplier from a Quasi-experiment”, American Economic Review, 104(7): 2185-

2209.

ECB Working Paper Series No 2255 / March 201922[2] Alesina, A. and Ardagna, S. (2013). “The Design of Fiscal Adjustments”, Tax Policy and the

Economy, 27(1): 19-68.

[3] Arslanalp, S. and Takahiro, T. (2012). “Tracking Global Demand for Advanced Economy

Sovereign Debt”, IMF WP/12/284.

[4] Acharya, V., Drechsler, I., and Schnabl, P. (2014). “A pyrrhic victory? Bank bailouts and

sovereign credit risk”, Journal of Finance, 69(6): 2689-2739.

[5] Auerbach, A. J. and Gorodnichenko, Y. (2012). “Measuring the output responses to ﬁscal

policy”, American Economic Journal: Economic Policy, 4(2): 1-27.

[6] Barro, R. J. (1974). “Are government bonds net wealth?”, Journal of Political Economy, 82(6):

1095-1117.

[7] Bernanke, B., Reinhart, V., and Sack, B. (2004). “Monetary Policy Alternatives at the Zero

Bound: An Empirical Assessment”, Brooking Papers on Economic Activity, 2: 1-100.

[8] Blanchard, O. J. and Leigh, D. (2013). “Growth Forecast Errors and Fiscal Multipliers”,

American Economic Review: Papers and Proceedings, 103(3): 117-120.

[9] Blanchard, O. J. and Perotti, R. (2002). “An empirical characterization of the dynamic eﬀects

of changes in government spending and taxes on output”, Quarterly Journal of Economics,

117(4): 1329-68.

[10] Broner, F., Didier, T., Erce, A., and Schmukler, S. (2013). “Gross Capital Flows: Dynamics

and Crises”, Journal of Monetary Economics, 60(1): 113-133.

[11] Broner, F., Erce, A., Martin, A., and Ventura, J. (2014). “Sovereign Debt Markets in Turbulent

Times: Creditor Discrimination and Crowding Out”, Journal of Monetary Economics, 61: 114-

142.

[12] Broner, F. and Ventura, J. (2014). “Globalization and Risk Sharing”, Review of Economic

Studies, 78(1): 49-82.

[13] Brutti F. and Saure, P. (2015). “Transmission of sovereign risk in the Euro crisis”, Journal of

International Economics, 97(2): 231-248.

ECB Working Paper Series No 2255 / March 201923[14] Brutti F. and Saure, P. (2016). “Repatriation of debt in the euro crisis”, Journal of the Euro-

pean Economic Association, 14(1): 145-174.

[15] Caballero, R., Farhi, E., and Gourinchas, P.O. (2016). “Safe Asset Scarcity and Aggregate

Demand”, American Economic Review Papers and Proceedings, 106(5): 513-518.

[16] Cacciatore M., and N. Traum (2018). “Trade Flows and Fiscal Multipliers”, Mimeo.

[17] Chari, V. V., Dovis, A., and Kehoe, P. J. (2016). “On the Optimality of Financial Repression”,

Research Department Staﬀ Report 1000, Federal Reserve Bank of Minneapolis.

[18] Christiano, L., Eichenbaum, M., and Rebelo, S. (2011). “When is the Government Spending

Multiplier Large?”, Journal of Political Economy, 119(1): 78-121.

[19] Corsetti, G., Meier, A., and Muller, G. J. (2012). “What determines government spending

multipliers?”, Economic Policy, 27(72): 521-565.

[20] Diamond, D. (1965). “National debt in a neoclassical growth model”, American Economic

Review, 55: 1126-1150.

[21] Farhi, E. and Werning, I. (2012). “Fiscal Multipliers: Liquidity Traps and Currency Unions”,

Handbook of Macroeconomics, 2: 2417-2492.

[22] Fahri, E. and Tirole, J. (2018). “Deadly Embrace: Sovereign and Financial Balance Sheets

Doom Loops”, Review of Economic Studies, forthcoming.

[23] Fisher, J. D. M. and Peters, R. (2010). “Using Stock Returns to Identify Government Spending

Shocks”, Economic Journal, 120: 414-436.

[24] Gennaioli, N., Martin, A., and Rossi, S. (2014). “Sovereign default, domestic banks, and

ﬁnancial institutions”, Journal of Finance, 69(2): 819-866.

[25] Guajardo, J., Leigh, D., and Pescatori, A. (2014). “Expansionary austerity? International

evidence”, Journal of the European Economic Association, 12(4): 949-968.

[26] Guembel, A. and Sussman, O. (2009). “Sovereign Debt without Default Penalties”, Review of

Economic Studies, 76(4): 1297-1320.

[27] Ilzetzki, E., Mendoza, E. G., and Vegh, C. A. (2013). “How big (small?) are ﬁscal multipliers?”,

Journal of Monetary Economics 60(2): 239-254.

ECB Working Paper Series No 2255 / March 201924[28] Jorda, O. (2005). “Estimation and Inference of Impulse Responses by Local Projections”,

American Economic Review, 95(1): 161-182.

[29] Jorda, O. and Taylor, A. M. (2016). “The Time for Austerity: Estimating the Average Treat-

ment Eﬀect of Fiscal Policy”, Economic Journal, 126(590): 219-255.

[30] Kataryniuk, I. and Valles, J. (2015). “Fiscal consolidation after the Great Recession: The role

of composition”, Banco de Espana Working Paper 1515.

[31] Kleibergen, F. and Paap, R. (2006). “Generalized reduced rank tests using the singular value

decomposition”, Journal of Econometrics, 133: 97-126.

[32] Kraay, A. and Ventura, J. (2000). “Current accounts in debtor and creditor countries”, Quar-

terly Journal of Economics, 115(4): 1137-1166.

[33] Mertens, K. and Ravn, M. O. (2013). “The Dynamic Eﬀects of Personal and Corporate Income

Tax Changes in the United States”, American Economic Review, 103(4): 1212-47.

[34] Miyamoto, W., Nguyen, T. L. and Sergeyev, D. (2018). “Government Spending Multipliers

under the Zero Lower Bound: Evidence from Japan”, American Economic Journal: Macroe-

conomics, 10(3): 247-277.

[35] Mountford, A. and Uhlig, H. (2009). “What are the eﬀects of ﬁscal policy shocks?”, Journal

of Applied Econometrics, 24(6): 960-992.

[36] Olea, J. L. M. and Pﬂueger, C. (2013). “A robust test for weak instruments”, Journal of

Business and Economics Statistics, 31: 358-368.

[37] Priftis, R. and Zimic, S. (2015). “Sources of Borrowing and Fiscal Multipliers”, in Fiscal Policy

in the Great Recession, European University Insitute, Department of Economics.

[38] Priftis, R. and Zimic, S. (2018). “Sources of borrowing and ﬁscal multipliers”, Bank of Canada

Staﬀ Working Paper 2018-32.

[39] Ramey, V. A. (2011a). “Can government purchases stimulate the economy?”, Journal of Eco-

nomic Literature, 49(3): 673-685.

[40] Ramey, V. A. (2011b). “Identifying government spending shocks: it’s all in the timing”, Quar-

terly Journal of Economics, 126(1): 1-50.

ECB Working Paper Series No 2255 / March 201925[41] Ramey, V. A. (2016). “Macroeconomic shocks and their propagation”, Handbook of Macroe-

conomics, 2: 71-162.

[42] Ramey, V. A. and Zubairy, S. (2018). “Government spending multipliers in good times and in

bad: Evidence from US historical data”, Journal of Political Economy, 126(2): 850-901.

[43] Reinhart, C. and Sbrancia, B. (2015). “The liquidation of government debt”, Economic Policy,

30(82): 291-333.

[44] Sanderson, E. and Windmeijer, F. (2016). “A weak instrument F -test in linear IV models with

multiple endogenous variables”, Journal of Econometrics, 190(2): 212-221.

[45] Shen, W., Yang, S.C.S. and Zanna, L.F. (2018). “Government spending eﬀects in low-income

countries ”, Journal of Development Economics, 133: 201-219.

[46] Sin J. (2016). “The Fiscal Multiplier in Small Open Economy: The Role of Liquidity Frictions”,

IMF Working Paper 16/138.

[47] Staiger, D. and Stock, J. H. (1997). “Instrumental variables regression with weak instruments”,

Econometrica, 65: 557-586.

[48] Stock, J. H. and Yogo, M. (2005). “Testing for weak instruments in linear IV regression”, In:

Andrews, D.W.K. and J.H. Stock (Eds.), Identiﬁcation and Inference for Econometric Models,

Essays in Honor of Thomas Rothenberg, Cambridge University Press, pp. 80-108.

[49] Uhlig, H. (2010). “Some Fiscal Calculus”, American Economic Review, 100(2): 30-34.

[50] Warnock, F. E.and Warnock, V. C. (2009). “International capital ﬂows and U.S. interest rates”,

Journal of International Money and Finance, 28(6): 903-919.

[51] Wu, T. (2005), The long-term interest rate conundrum: Not unraveled yet?,” FRBSF Economic

Letter, (29), April.

ECB Working Paper Series No 2255 / March 201926FiguresandTablesFIGURE1.ForeignshareofU.S.publicdebtholdings0.1.2.3.4.5Foreign share196019701980199020002010yearNotes:Foreignshareistherestoftheworld’sholdingsofU.S.federalgovernment’streasurysecuritiesliabilitiesasaproportionoftotalU.S.federalgovernmenttreasurysecuritiesliabilities.ECB Working Paper Series No 2255 / March 201927FIGURE2.IdentifedU.S.ﬁscalshocks-.1-.050.05.1196019701980199020002010 Defense news shockEstimated shockIdentified U.S. fiscal shocksNotes:ThedefensenewsshocksarefromRameyandZubairy(2018).TheBlanchard-PerottishocksaretheresidualsfromourestimationofastructuralVARalaBlanchardandPerotti(2002).BothshocksarenormalizedbypotentialGDP.ECB Working Paper Series No 2255 / March 201928FIGURE3.Baselinemodel:U.S.outputmultiplier-.50.511.512345678910111213141516quarterBaselineNotes:CumulativeGDPmultiplierfromadefensenewsshockequalto1%ofGDP.Theshadedarearepresentsthe90%conﬁdencebands.ECB Working Paper Series No 2255 / March 201929FIGURE4.Foreignshare:U.S.outputmultiplier0123412345678910111213141516quarterLow foreign share0123412345678910111213141516quarterHigh foreign share0123412345678910111213141516quarterDifferenceNotes:CumulativeGDPmultipliersfromadefensenewsshockequalto1%ofGDPwithlow(10thpercentileofforeignholdingsinthesample)andhigh(90thpercentileofforeignholdingsinthesample)foreignshare,andthedifferencebetweenthetwomultipliers.Theshadedarearepresentsthe90%conﬁdencebands.ECB Working Paper Series No 2255 / March 201930FIGURE5.EffectonU.S.outputofagovernmentexpenditureshockafter4quarters1952195619601964196819721976198019841988199219962000200420082012year-0.500.511.522.533.544.5Effect on output of 1% change in government expenditure after 4 quarters (1952:1 - 2015:2)Notes:Foreignshare-dependentcumulativemultiplierafterfourperiodsfromadefensenewsshockequalto1%ofGDP.Thedashedlinesrepresentsthe90%conﬁdencebands.ECB Working Paper Series No 2255 / March 201931FIGURE6.Foreignshare:pre-crisisU.S.outputmultiplier-2024612345678910111213141516quarterLow foreign share-2024612345678910111213141516quarterHigh foreign share-2024612345678910111213141516quarterDifferenceNotes:Pre-crisisperioddeﬁnedasuptoandincluding2006.Cumulativemultipliersfromadefensenewsshockequalto1%ofGDPforlow(10thpercentileofforeignholdingsinthesample)andhigh(90thpercentileofforeignholdingsinthesample)foreignshare,andthedifferencebetweenthetwomultipliers.Theshadedarearepresentsthe90%conﬁdencebands.ECB Working Paper Series No 2255 / March 201932FIGURE7A.Foreignshare:U.S.consumptionmultiplier-1.5-1-.50.5112345678910111213141516quarterLow foreign share-1.5-1-.50.5112345678910111213141516quarterHigh foreign share-1.5-1-.50.5112345678910111213141516quarterDifferenceNotes:Cumulativeconsumptionmultipliersfromadefensenewsshockequalto1%ofGDPforlow(10thpercentileofforeignholdingsinthesample)andhigh(90thpercentileofforeignholdingsinthesample)foreignshare,andthedifferencebetweenthetwomultipliers.Theshadedarearepresentsthe90%conﬁdencebands.ECB Working Paper Series No 2255 / March 201933FIGURE7B.Foreignshare:U.S.investmentmultiplier-202412345678910111213141516quarterLow foreign share-202412345678910111213141516quarterHigh foreign share-202412345678910111213141516quarterDifferenceNotes:Cumulativeinvestmentmultipliersfromadefensenewsshockequalto1%ofGDPforlow(10thpercentileofforeignholdingsinthesample)andhigh(90thpercentileofforeignholdingsinthesample)foreignshare,andthedifferencebetweenthetwomultipliers.Theshadedarearepresentsthe90%conﬁdencebands.ECB Working Paper Series No 2255 / March 201934FIGURE7C.Foreignshare:U.S.currentaccountmultiplier-1-.50.512345678910111213141516quarterLow foreign share-1-.50.512345678910111213141516quarterHigh foreign share-1-.50.512345678910111213141516quarterDifferenceNotes:Cumulativecurrentaccountmultipliersfromadefensenewsshockequalto1%ofGDPforlow(10thpercentileofforeignholdingsinthesample)andhigh(90thpercentileofforeignholdingsinthesample)foreignshare,andthedifferencebetweenthetwomultipliers.Theshadedarearepresentsthe90%conﬁdencebands.ECB Working Paper Series No 2255 / March 201935FIGURE8A.Foreignshareandtimetrend:U.S.outputmultiplier-10-5051012345678910111213141516quarterLow foreign share-10-5051012345678910111213141516quarterHigh foreign share-10-5051012345678910111213141516quarterDifferenceNotes:CumulativeGDPmultipliersfromadefensenewsshockequalto1%ofGDPforlow(10thper-centileofforeignholdingsinthesample)andhigh(90thpercentileofforeignholdingsinthesample)foreignsharewhenatimetrendisincludedasanalternativeexplanation,andthedifferencebetweenthetwomultipliers.Theshadedarearepresentsthe90%conﬁdencebands.ECB Working Paper Series No 2255 / March 201936FIGURE8B.Foreignshareandtradeopenness:U.S.outputmultiplier-505101512345678910111213141516quarterLow foreign share-505101512345678910111213141516quarterHigh foreign share-505101512345678910111213141516quarterDifferenceNotes:CumulativeGDPmultipliersfromadefensenewsshockequalto1%ofGDPforlow(10thper-centileofforeignholdingsinthesample)andhigh(90thpercentileofforeignholdingsinthesample)foreignsharewhentradeopennessisincludedasanalternativeexplanation,andthedifferencebetweenthetwomultipliers.Theshadedarearepresentsthe90%conﬁdencebands.ECB Working Paper Series No 2255 / March 201937FIGURE8C.Foreignshareandpublicdebt:U.S.outputmultiplier-2024612345678910111213141516quarterLow foreign share-2024612345678910111213141516quarterHigh foreign share-2024612345678910111213141516quarterDifferenceNotes:CumulativeGDPmultipliersfromadefensenewsshockequalto1%ofGDPforlow(10thper-centileofforeignholdingsinthesample)andhigh(90thpercentileofforeignholdingsinthesample)foreignsharewhenthepublicdebt-to-GDPratioisincludedasanalternativeexplanation,andthedif-ferencebetweenthetwomultipliers.Theshadedarearepresentsthe90%conﬁdencebands.ECB Working Paper Series No 2255 / March 201938FIGURE9.Internationalpanel:Foreignanddomesticpublicdebtholdings(asa%ofGDP)020406080100Debt holdings by foreigners (as a % of GDP)050100150200Debt holdings by residents (as a % of GDP)Notes:Foreignanddomesticholdingsofpublicdebt,asapercentageofGDP.ECB Working Paper Series No 2255 / March 201939FIGURE10.Internationalpanel:Foreignshareofpublicdebtholdings05010005010005010005010019801990200020101980199020002010198019902000201019801990200020101980199020002010AustraliaAustriaBelgiumCanadaDenmarkFinlandFranceGermanyIrelandItalyJapanNetherlandsPortugalSpainSwedenUnited KingdomUnited StatesGraphs by countryNotes:Foreignshareisourmeasureofforeignholdingsofpublicdebt,asapercentageoftotalpublicdebt.ECB Working Paper Series No 2255 / March 201940FIGURE11.Internationalpanel:Identifednarrativeﬁscalshocks-6-4-20-6-4-20-6-4-20-6-4-2019801990200020101980199020002010198019902000201019801990200020101980199020002010AustraliaAustriaBelgiumCanadaDenmarkFinlandFranceGermanyIrelandItalyJapanNetherlandsPortugalSpainSwedenUnited KingdomUnited StatesGraphs by countryNotes:TheshocksarefromGuajardoetal.(2014),updatedbyKataryniukandValles(2015).Themagni-tudesoftheshocksreﬂecttheexpectedfuturebudgetaryimpactoftheconsolidations,asapercentageofGDP.ECB Working Paper Series No 2255 / March 201941FIGURE12.Internationalpanelbaselinemodel:outputmultiplier0.511.51234YearNotes:CumulativeGDPmultipliersfromanarrativeﬁscalshockequalto1%ofGDP.Theshadedarearepresentsthe90%conﬁdencebands.ECB Working Paper Series No 2255 / March 201942FIGURE13.Internationalpanelforeignshare:outputmultiplier-1012341234YearLow foreign share-1012341234YearHigh foreign share-1012341234YearDifferenceNotes:CumulativeGDPmultipliersfromanarrativeﬁscalshockequalto1%ofGDPforlow(10thpercentileofforeignholdingsinthesample)andhigh(90thpercentileofforeignholdingsinthesample)foreignshare,andthedifferencebetweenthetwomultipliers.Theshadedarearepresentsthe90%conﬁdencebands.ECB Working Paper Series No 2255 / March 201943TABLE1.SummarystatisticsforidentiﬁedU.S.ﬁscalshocksdefensenewsshocksEstimatedshocksNo.ofobservations255255Mean0.00410.0008Median0.00000.0007Standarddeviation0.01140.0029Minimum-0.0913-0.0071Maximum0.06350.0131Notes:ThedefensenewsshocksarefromRameyandZubairy(2018).TheBlanchard-PerottishocksaretheresidualsfromourestimationofastructuralVARalaBlanchardandPerotti(2002).BothshocksarenormalizedbypotentialGDP.ECB Working Paper Series No 2255 / March 201944TABLE2.PredictiveabilityofaverageforeignshareUnitedStatesInternationalPanel∆Foreignholdings∆Foreignholdings∆Totaldebt0.020.134∗∗∗(0.034)(0.059)Foreignshare0.003∗-0.63∗∗∗(0.001)(0.134)∆Totaldebt·Foreignshare0.878∗∗∗0.767∗∗∗(0.170)(0.124)SeasonaldummiesYesNoYeardummiesNoYesCountryﬁxedeffectsNoYesObservations253421Notes:ForeignholdingsandtotaldebtaremeasuredasapercentageofGDP.Foreignshareisourmeasureofforeignholdingsofpublicdebtasapercentageoftotalpublicdebt.Standarderrorsinparentheses.∗p<0.10,∗∗p<0.05,∗∗∗p<0.01.ECB Working Paper Series No 2255 / March 201945TABLE3.Baselinemodel:U.S.outputmultiplier(1)(2)(3)(4)Quartert+1Quartert+2Quartert+3Quartert+4Fiscalshockt0.91∗∗∗0.89∗∗∗0.76∗∗∗0.62∗∗∗(0.29)(0.29)(0.24)(0.23)OthercontrolsYesYesYesYesObs.254254253252(5)(6)(7)(8)Quartert+5Quartert+6Quartert+7Quartert+8Fiscalshockt0.52∗∗0.49∗0.460.40(0.25)(0.28)(0.30)(0.31)OthercontrolsYesYesYesYesObs.251250249248Notes:TheﬁscalshockisgovernmentexpenditureinstrumentedbythedefensenewsshocksfromRameyandZubairy(2018)andtheresidualsfromourestimationofastructuralVARalaBlanchardandPerotti(2002).BothshocksarenormalizedbypotentialGDP.Standarderrorsinparentheses.∗p<0.10,∗∗p<0.05,∗∗∗p<0.01ECB Working Paper Series No 2255 / March 201946TABLE4.Foreignshare:U.S.outputmultiplier(1)(2)(3)(4)Quartert+1Quartert+2Quartert+3Quartert+4Fiscalshockt0.340.350.330.26(0.44)(0.43)(0.35)(0.31)Fiscalshockt·Foreignsharet−15.80∗∗∗6.26∗∗∗5.76∗∗∗5.54∗∗∗(1.88)(1.92)(1.74)(1.74)OthercontrolsYesYesYesYesObservations254254253252(5)(6)(7)(8)Quartert+5Quartert+6Quartert+7Quartert+8Fiscalshockt0.190.220.250.27(0.33)(0.35)(0.37)(0.39)Fiscalshockt·Foreignsharet−15.64∗∗∗5.48∗∗5.14∗∗4.57∗(2.03)(2.28)(2.46)(2.52)OthercontrolsYesYesYesYesObservations251250249248Notes:TheﬁscalshockisgovernmentexpenditureinstrumentedbythedefensenewsfromRameyandZubairy(2018)andtheresidualsfromourestimationofastructuralVARalaBlanchardandPerotti(2002).BothshocksarenormalizedbypotentialGDP.Foreignshareisourmeasureofforeignholdingsofpublicdebt,asapercentageoftotalpublicdebt.Standarderrorsinparentheses.∗p<0.10,∗∗p<0.05,∗∗∗p<0.01ECB Working Paper Series No 2255 / March 201947TABLE5.Internationalpanelbaselinemodel:outputmultiplier(1)(2)(3)(4)Yeart+1Yeart+2Yeart+3Yeart+4Fiscalshockt0.29∗0.41∗∗0.50∗0.56(0.18)(0.20)(0.26)(0.36)OthercontrolsYesYesYesYesObservations576558540523Notes:Theﬁscalshockiscyclically-adjustedprimarydeﬁcitinstrumentedbythenarrativeshocksfromGuajardoetal.(2014),updatedbyKataryniukandValles(2015).Themagnitudesoftheshocksreﬂecttheexpectedfuturebudgetaryimpactoftheconsolidations,asapercentageofGDP.Standarderrorsinparentheses.∗p<0.10,∗∗p<0.05,∗∗∗p<0.01ECB Working Paper Series No 2255 / March 201948TABLE6.Internationalpanelforeignshare:outputmultiplier(1)(2)(3)(4)Yeart+1Yeart+2Yeart+3Yeart+4Fiscalshockt-0.69-0.35-0.25-0.61(0.56)(0.46)(0.40)(0.67)Fiscalshockt·Foreignsharet−12.771.87∗∗2.54∗∗4.64∗∗(1.84)(0.92)(1.20)(2.12)OthercontrolsYesYesYesYesObservations405387369352Notes:Theﬁscalshockiscyclically-adjustedprimarydeﬁcitinstrumentedbythenarrativenarrativeshocksfromGuajardoetal.(2014),updatedbyKataryniukandValles(2015).Themagnitudesoftheshocksreﬂecttheexpectedfuturebudgetaryimpactoftheconsolidations,asapercentageofGDP.Foreignshareisourmeasureofforeignholdingsofpublicdebtasapercentageoftotalpublicdebt.Standarderrorsinparentheses.∗p<0.10,∗∗p<0.05,∗∗∗p<0.01ECB Working Paper Series No 2255 / March 201949ADatadeﬁnitionandsources:UnitedStatesWeexpandthequarterlydatasetcompiledbyRameyandZubairy(2018)toincludeourmeasureoftheforeignshare,aswellasprivateconsumption,privateinvestmentandnetexports.Theavailabilityofdataforourforeignsharemeasuremeansoursamplerunsfrom1951:Q3to2015:Q1.Belowweprovideabriefoverviewofthedatasourcesandtheirdeﬁnitions.PopulationisfromtheFederalReserveBankofSt.LouisFREDdatabase(FREDseries:POP’);GovernmentspendingisgovernmentconsumptionexpenditureandgrossinvestmentfromtheBEA(NIPATable1.1.3line22);defensenewsshockscomesfromRamey(2016);NominalOutputisnominalGDPfromtheBEA(NIPATable1.1.5line1);RealOutputisrealGDPfromtheBEA(NIPATable1.1.3line1);PotentialoutputiscomputedastheHP-ﬁlteredrealGDP;EstimatedshocksaretheresidualsfromastructuralVARwithgovernmentspendingandrealGDP(andtheirlags)asmacroeconomicdeterminants;PublicdebtistheU.S.federalgovernment’streasurysecuritiesliabilities(FREDseries:FGTSUSQ027S).Asthisisonlyavailablefromtheﬁrstquarterof1970,weusethelongerquarterlyseriesprovidedbyRameyandZubairy(2018).Thetwoseriesoverlapalmostperfectlyduringtheperiodtheyarebothavailable;Foreignshareiscomputedastherestoftheworld’streasurysecuritiesassets(FREDseries:ROWTSEQ027S)asaproportionoftheU.S.publicdebt;PrivateconsumptionisfromtheBEA(NIPATable1.1.3line2);PrivateinvestmentisfromtheBEA(NIPATable1.1.3line7);NetexportsisexportsofgoodsandservicesfromtheBEA(NIPATable1.1.3line16)minusimportsofgoodsandservicesfromtheBEA(NIPATable1.1.3line19);CurrentaccountisthebalanceoncurrentaccountfromtheBEA(NIPATable4.1line31).ECB Working Paper Series No 2255 / March 201950BInstrumentrelevance:UnitedStatesWeuseinstrumentalvariableregressionstoexaminehowforeignholdingsofpublicdebtaﬀectthesizeofU.S.ﬁscalmultipliers.Wereportheretheﬁrst-stageregressionresults,relatedtothe(second-stage)regressionresultsdiscussedinSection4.TheresultsinTablesA.1andA.2correspondtotheestimationoftheinstrumentsonU.S.governmentexpenditureandU.S.governmentexpenditureinteractedwithourmeasureofforeignsharerespectively.RameyandZubairy(2018)demonstratethatacombinationofthedefensenewsshockandashockderivedfromtheBlanchardandPerotti(2002)VARspeciﬁcationdeliversthemostrelevantinstrumentsfortheanalysisofU.S.governmentspendingmultipliers.Theyﬁndthatthisholdsforboththelinearandstate-dependentcases.Wethereforeusebothﬁscalshockstoinstrumentgovernmentspending.Inthetables,“newsshock”represents(cid:15)Ntandthe“estimatedshock”is(cid:15)Vt.Wheninteractedwiththeforeignsharevariabletheyrepresentthe(cid:15)Nt·Xt−1and(cid:15)Vt·Xt−1termsfromtheﬁrst-stageregressionsinSection4.Theﬁrst-stageresultsshowthattheinteractionoftheﬁscalshocksandforeignsharearestatisticallysigniﬁcantinbothregressions.[INSERTTABLEA.1][INSERTTABLEA.2]However,theinstrumentalvariableapproachisinvalidiftheinstrumentsareirrelevantorhaveonlyweakrelevance.Testsofunderidentiﬁcationassesswhetherinstrumentsarerelevant,whiletestsofweakidentiﬁcationexaminewhetherinstrumentsareweak.Althoughtherearemanymethodstoconductthesetests,theyarenotallappropriateforouranalysis.OuruseofmorethanoneendogenousvariablerulesouttheStaigerandStock(1997)testofweakidentiﬁcation,aswellastheOleaandPﬂueger(2013)testusedbyRameyandZubairy(2018).StockandYogo(2005)providecriticalvaluesformultipleendogenousregressorsandmultipleinstruments,butassumeconditionalhomoskedasticerrorterms.Instead,weusetheteststatisticsfromKleibergenandPaap(2006)andSandersonandWind-meijer(2016).TheKleibergen-PaaprkWaldstatisticallowsfortestsofweakidentiﬁcationwhentherearemorethanoneendogenousvariableandtheerrorsareheteroskedasticandseriallycorre-lated.ThisistheteststatisticreportedinTableA.3.Thistest,however,isonlyformallyjustiﬁedinthecontextofunderidentiﬁed,andnotweak,instruments.SandersonandWindmeijer(2016)ECB Working Paper Series No 2255 / March 201951providestestsofweakandunderidentiﬁcationforeachendogenousregressorseparately.1There-sultsfortheSandersonandWindmeijer(2016)weakandunderidentiﬁcationtestsareinTablesA.4andA.5respectively.SandersonandWindmeijer(2016)notethattheStockandYogo(2005)crit-icalvaluescanbeusedfortheirconditionalF-statistics.Forourcaseoftwoendogenousregressorsandfourinstruments,thecriticalvaluesfortheStockandYogo(2005)weakIDtestare:•5%maximalIVrelativebias:11.04•10%maximalIVrelativebias:7.56•20%maximalIVrelativebias:5.57•30%maximalIVrelativebias:4.73•10%maximalIVsize:16.87•15%maximalIVsize:9.93•20%maximalIVsize:7.54•25%maximalIVsize:6.28[INSERTTABLEA.3][INSERTTABLEA.4][INSERTTABLEA.5]Takentogether,theresultsinTablesA.3,A.4andA.5showthatouridentiﬁed(defensenewsandBlanchard-Perotti)shocksarerelevantinstrumentsfortheintegralofgovernmentspending.Thisisparticularlythecasewhengovernmentspendingisinteractedwithourforeignsharevariable.Wethereforebelievetheyaresuitableforuseintheempiricalanalysis.CDatadeﬁnitionandsources:InternationalPanelC.1MacroeconomicdataTomaximizeconsistencyacrosscountries,wecollectasmanymacroeconomicvariablesaspossiblefromtheOECD’sEconomicOutlookNo.95,fromNovember2015.Duetotheavailabilityoftheﬁscalshockdata,ourmaximumsampleperiodrunsfrom1978to2014.1Fortheweakidentiﬁcationtest,thecriticalvaluesareonlyavailableforthei.i.d.case.ECB Working Paper Series No 2255 / March 201952AllcountriesPopulationisthetotalpopulation(OECDseries:POP);Governmentspend-ingisthevolumeofﬁnalgovernmentexpenditure(OECDseries:CGV);NominalOutputisnominalGDP(OECDseries:NGDP);RealOutputisnominaloutputdividedbytheGDPdeﬂator(OECDseries:PGDP);PotentialoutputiscomputedastheHP-ﬁlteredrealGDP;Budgetdeﬁcitisthevalueofthecyclically-adjustedprimarybalance(OECDseries:NLGXA);Privateconsumptionisthevolumeofﬁnalprivateconsumptionexpenditure(OECDseries:CPV);Privateinvestmentisthevolumeofprivatetotalﬁxedcapitalformation(OECDseries:IPV);Netexportsisthevalueofexportsofgoodsandservices(OECDseries:NX)minusthevalueofimportsofgoodsandservices(OECDseries:NM).C.2NetcapitalﬂowsThedataonnetcapitalﬂowscomesfromtheFinancialAccountoftheIMF’sBalanceofPaymentsStatistics.Inordertostretchthesamplebackintime,wemergedatafromtwodiﬀerentmethod-ologies(BMP5andBMP6)forseveralcountries.Australia:InternationalMonetaryFund,BalanceofPayments,FinancialAccount.1978-1989:BMP5,Havercode:N193F95Y@IMFBOPA1990-2014:BMP6,Havercode:B193F00Y@IMFBOPAAustria:InternationalMonetaryFund,BalanceofPayments,FinancialAccount.1978-2004:BMP5,Havercode:N122F95Y@IMFBOPA2005-2014:BMP6,Havercode:B122F00Y@IMFBOPABelgium:InternationalMonetaryFund,BalanceofPayments,FinancialAccount.2005-2014:BMP6,Havercode:B124F00Y@IMFBOPACanada:InternationalMonetaryFund,BalanceofPayments,FinancialAccount.1978-2014:BMP6,Havercode:B156F00Y@IMFBOPADenmark:InternationalMonetaryFund,BalanceofPayments,FinancialAccount.1978-2014:BMP6,Havercode:B128F00Y@IMFBOPAECB Working Paper Series No 2255 / March 201953Finland:InternationalMonetaryFund,BalanceofPayments,FinancialAccount.1978-2014:BMP6,Havercode:B172F00Y@IMFBOPAFrance:InternationalMonetaryFund,BalanceofPayments,FinancialAccount.1978-2014:BMP6,Havercode:B132F00Y@IMFBOPAGermany:InternationalMonetaryFund,BalanceofPayments,FinancialAccount.1978-2014:BMP6,Havercode:B134F00Y@IMFBOPAIreland:InternationalMonetaryFund,BalanceofPayments,FinancialAccount.1978-2004:BMP5,Havercode:N178F95Y@IMFBOPA2005-2014:BMP6,Havercode:B178F00Y@IMFBOPAItaly:InternationalMonetaryFund,BalanceofPayments,FinancialAccount.1978-2014:BMP6,Havercode:B136F00Y@IMFBOPAJapan:InternationalMonetaryFund,BalanceofPayments,FinancialAccount.1978-1995:BMP5,Havercode:N158F95Y@IMFBOPA1996-2014:BMP6,Havercode:B158F00Y@IMFBOPANetherlands:InternationalMonetaryFund,BalanceofPayments,FinancialAccount.1978-2014:BMP6,Havercode:B138F00Y@IMFBOPAPortugal:InternationalMonetaryFund,BalanceofPayments,FinancialAccount.1978-2014:BMP6,Havercode:B182F00Y@IMFBOPASpain:InternationalMonetaryFund,BalanceofPayments,FinancialAccount.1978-2014:BMP6,Havercode:B184F00Y@IMFBOPASweden:InternationalMonetaryFund,BalanceofPayments,FinancialAccount.1978-2014:BMP6,Havercode:B144F00Y@IMFBOPAECB Working Paper Series No 2255 / March 201954UnitedKingdom:InternationalMonetaryFund,BalanceofPayments,FinancialAccount1978-2014:BMP6,Havercode:B112F00Y@IMFBOPAUnitedStates:InternationalMonetaryFund,BalanceofPayments,FinancialAccount.1978-2014:BMP6,Havercode:B111F00Y@IMFBOPAC.3ExchangeratesAllcapitalﬂowdataareinU.S.dollars.WeconverttonationalcurrencyvaluesusingexchangeratesprovidedbytheFederalReserveBoard(FRB).WeusetheaverageannualexchangeratefromtheFRBG.5release.Datafortheeuroareacountriesonlybeginsin1980.Beforethis,weusetheindividualnationalcurrenciestoUSdollarexchangerateanddivideitbytheindividualnationalcurrencytoeuroexchangerate.Australia:FederalReserveBoard,ForeignExchangeRates.1978-2014:AustralianDollar/USDollarforeignexchangerate.Havercode:A193@FXRATESAustria:FederalReserveBoard,ForeignExchangeRates.1978-1979:BelgianFranc/USDollarforeignexchangerate(Havercode:FXBLG@USECON)di-videdbyBelgium-LuxembourgFranc/Euroforeignexchangerate(Havercode:X126EXR@EUDATA)1980-2014:SyntheticEuro/USDollarforeignexchangerate.Havercode:A122@FXRATESBelgium:FederalReserveBoard,ForeignExchangeRates.1978-1979:AustrianSchilling/USDollarforeignexchangerate(Havercode:FXAST@USECON)dividedbyAustrianSchilling/Euroforeignexchangerate(Havercode:X122EXR@EUDATA)1980-2014:SyntheticEuro/USDollarforeignexchangerate.Havercode:A124@FXRATESCanada:FederalReserveBoard,ForeignExchangeRates.1978-2014:CanadianDollar/USDollarforeignexchangerate.Havercode:A156@FXRATESDenmark:FederalReserveBoard,ForeignExchangeRates.1978-2014:DanishKrone/USDollarforeignexchangerate.Havercode:A128@FXRATESECB Working Paper Series No 2255 / March 201955Finland:FederalReserveBoard,ForeignExchangeRates.1978-1979:FinnishMarkka/USDollarforeignexchangerate(Havercode:FXFIN@USECON)dividedbyFinnishMarkka/Euroforeignexchangerate(Havercode:X172EXR@EUDATA)1980-2014:SyntheticEuro/USDollarforeignexchangerate.Havercode:A172@FXRATESFrance:FederalReserveBoard,ForeignExchangeRates.1978-1979:FrenchFranc/USDollarforeignexchangerate(Havercode:FXFR@USECON)dividedbyFrenchFranc/Euroforeignexchangerate(Havercode:X132EXR@EUDATA)1980-2014:SyntheticEuro/USDollarforeignexchangerate.Havercode:A132@FXRATESGermany:FederalReserveBoard,ForeignExchangeRates.1978-1979:GermanDeutschmark/USDollarforeignexchangerate(Havercode:FXGER@USECON)dividedbyGermanDeutschmark/Euroforeignexchangerate(Havercode:X134EXR@EUDATA)1980-2014:SyntheticEuro/USDollarforeignexchangerate.Havercode:A134@FXRATESIreland:FederalReserveBoard,ForeignExchangeRates.1978-1979:IrishPound/USDollarforeignexchangerate(Havercode:FXIRL@USECON)dividedbyIrishPound/Euroforeignexchangerate(Havercode:X178EXR@EUDATA)1980-2014:SyntheticEuro/USDollarforeignexchangerate.Havercode:A178@FXRATESItaly:FederalReserveBoard,ForeignExchangeRates.1978-1979:ItalianLira/USDollarforeignexchangerate(Havercode:FXITL@USECON)dividedbyItalianLira/Euroforeignexchangerate(Havercode:X136EXR@EUDATA)1980-2014:SyntheticEuro/USDollarforeignexchangerate.Havercode:A136@FXRATESJapan:FederalReserveBoard,ForeignExchangeRates.1978-2014:JapaneseYen/USDollarforeignexchangerate.Havercode:A158@FXRATESNetherlands:FederalReserveBoard,ForeignExchangeRates.1978-1979:DutchGuilder/USDollarforeignexchangerate(Havercode:FXNET@USECON)dividedbyDutchGuilder/Euroforeignexchangerate(Havercode:X138EXR@EUDATA)ECB Working Paper Series No 2255 / March 2019561980-2014:SyntheticEuro/USDollarforeignexchangerate.Havercode:A138@FXRATESPortugal:FederalReserveBoard,ForeignExchangeRates.1978-1979:PortugueseEscudo/USDollarforeignexchangerate(Havercode:FXPOR@USECON)dividedbyPortugueseEscudo/Euroforeignexchangerate(Havercode:X182EXR@EUDATA)1980-2014:SyntheticEuro/USDollarforeignexchangerate.Havercode:A182@FXRATESSpain:FederalReserveBoard,ForeignExchangeRates.1978-1979:SpanishPeseta/USDollarforeignexchangerate(Havercode:FXSPA@USECON)dividedbySpanishPeseta/Euroforeignexchangerate(Havercode:X184EXR@EUDATA)1980-2014:SyntheticEuro/USDollarforeignexchangerate.Havercode:A184@FXRATESSweden:FederalReserveBoard,ForeignExchangeRates.1978-2014:SwedishKrona/USDollarforeignexchangerate.Havercode:A144@FXRATESUnitedKingdom:FederalReserveBoard,ForeignExchangeRates.1978-2014:BritishPound/USDollarforeignexchangerate.Havercode:A112@FXRATESC.4PublicdebtWherepossible,weusetotalgeneralgovernmentdebt.Weextendtheseriesbackbygatheringdatadirectlyfromdomesticandinternationalsources.Australia:Non-consolidatedgeneralgovernmentdebt.Millionsofnationalcurrency.Finalquartertakenastheannualvalue.1988-2014:FinancialAccountbyInstitutionalSector,FlowofFunds.Havercode:AUNFLGGD@ANZ.Austria:Sumofgovernmentdebtheldbyresidentsandnon-residents.Millionsofnationalcurrency.EuropeanCentralBankStatisticalDataWarehouse.1995-2014:Variablecodes:GFS.A.N.AT.W2.S13.S1.C.L.LE.GD.T.Z.XDC.T.F.V.N.T(residents);GFS.A.N.AT.W1.S13.S1.C.L.LE.GD.T.Z.XDC.T.F.V.N.T(non-residents).ECB Working Paper Series No 2255 / March 201957Belgium:ConsolidatedgrossdebtofGeneralGovernment.Millionsofnationalcurrency.1990-2014:NationalBankofBelgium.Havercode:BEAFD@BENELUX.Canada:Grossdebtofthegeneralgovernment.Millionsofnationalcurrency.1981-2014:InternationalMonetaryFund,WorldEconomicOutlookDatabase.Havercode:A156GDS@IMFWEO.Denmark:1990-1991:Sumofshort-andlong-termgeneralgovernmentdebt.Millionsofna-tionalcurrency.EuropeanCentralBankStatisticalDataWarehouse.Variablecodes:GST.A.DK.N.B0X13.MJS.B1300.SA.NT(short-termdebt);GST.A.DK.N.B0X13.MJM.B1300.SA.N(long-termdebt).1992-2014:Grossdebtofthegeneralgovernment.InternationalMonetaryFund,WorldEconomicOutlookDatabase.Havercode:A128GDS@IMFWEO.Finland:Grossdebtofthe(consolidated)generalgovernment.Millionsofnationalcurrency.1990-2014:StatisticsFinland.France:Sumofgovernmentdebtheldbyresidentsandnon-residents,consolidatingforwithingeneralgovernmentholdings.Millionsofnationalcurrency.1995-2014:EuropeanCentralBankStatisticalDataWarehouse.Variablecodes:GFS.A.N.FR.W2.S13.S1.C.L.LE.GD.T.Z.XDC.T.F.V.N.T(residents);GFS.A.N.FR.W1.S13.S1.C.L.LE.GD.T.Z.XDC.T.F.V.N.T(non-residents);GFS.A.N.FR.W2.S13.S13.CI.L.LE.GD.T.Z.XDC.T.F.V.N.T(intrageneralgovernment).Germany:ConsolidatedGeneralGovernmentliabilities.Millionsofnationalcurrency.1990-20014:EuropeanCentralBankStatisticalDataWarehouse.Variablecode:GST.A.DE.N.B0000.MAL.B1300.SA.E.Dataforyear1990wasextractedfromtheBruegeldatasetonsovereignholdings.Ireland:Holdingsoflong-termgovernmentbondsbysectors.Millionsofnationalcurrency.1987-2014:CentralBankofIreland,SecuritiesStatistics.SumofresidentsectorsholdingsandECB Working Paper Series No 2255 / March 201958Nonresidentsectorholdings.Italy:ConsolidatedGeneralGovernmentDebt.Millionsofnationalcurrency.1980-2014:Bancad’Italia.Sumofgovernmentdebtheldbyresidentandnon-residentsectors.Datastreamvariablecodes:ITNPD6@ITALY(debtheldbyBancad’Italia);ITNPD8@ITALY(debtheldbyOtherResidentMFIs);ITNPD8@ITALY(debtheldbyOtherResidentFinancialInstitutions);ITNPD12@ITALY(debtheldbyOtherResidents);ITNPD14@ITALY(debtheldbyNonresidents).Japan:Sumofgovernmentdomesticlawbonds,foreignlawbondsandT-bills.Billionsofnationalcurrency.1982-2014:BankofJapanDatabase,PublicFinance.Datacode:PF’PFGD11(governmentbonds,domesticlaw);PF’PFGD12(governmentbonds,foreignlaw);PF’PFGD@01(governmentT-bills).Netherlands:GrossGeneralGovernmentDebt.Millionsofnationalcurrency.1990-2014:EuropeanCentralBankStatisticalDataWarehouse.Variablecodes:GST.A.NL.N.B0000.MAL.B1300.SA.EPortugal:GrossGeneralGovernmentDebt.Millionsofnationalcurrency.1995-2014:EuropeanCentralBankStatisticalDataWarehouse.Variablecodes:GST.A.PT.N.B0000.MAL.B1300.SA.ESpain:GeneralGovernmentsecurities.Millionsofnationalcurrency.1989-2014:StatisticalBulletinofBankofSpain.FinancialAccounts:Securitiesholdingsbyin-stitutionalsectors.Sumofalldomesticsectors(code:BE313.4)andRestoftheWorld(code:BE313.29),minusintra-governmentholdings(code:BE313.19).Sweden:GrossGeneralGovernmentDebt.Millionsofnationalcurrency.1995-2014:EuropeanCentralBankStatisticalDataWarehouse.Sumofliabilitiesvis-a-visresidentandNonresidentsectors.Variablecodes:GFS.A.N.SE.W1.S13.S1.C.L.LE.GD.T.Z.XDC.T.F.V.N.T(Domesticexcl.Generalgovernment);GFS.A.N.SE.W2.S13.S1.C.L.LE.GD.TZ.XDC.T.F.V.N.T(RestoftheWorld);ECB Working Paper Series No 2255 / March 201959GFS.A.N.SE.W2.S13.S13.CI.L.LE.GD.T.Z.XDC.T.F.V.N.T(Intra-Generalgovernment).UnitedKingdom:Long-termbondsoftheCentralGovernment.Millionsofnationalcur-rency.Fourthquartertakenastheannualvalue.OﬃceofNationalStatistics.1987-2013:Variablecode:AF.3321:CPNSAUnitedStates:FederalGovernment,Treasurysecuritiesliabilities.Millionsofnationalcur-rency.1978-2014:FederalReserveBankofSt.LouisFREDdatabase.FREDseries:FGTSUSQ027S.Fourthquartertakenastheannualvalue.C.5ForeignshareThisistheforeignholdingsoftotalpublicdebt,asdescribedabove.Weextendtheseriesbackbygatheringdatadirectlyfromdomesticandinternationalsources.Australia:Liabilitiesofthepublicsector(generalgovernment)heldbytherestoftheworld.Millionsofnationalcurrency.1988-2014:AustralianBureauofStatistics,BalanceofPaymentsandInternationalInvestmentPo-sition,ForeignDebtLevels,Table30.SeriesID:A3374931F.Austria:GeneralGovernmentdebtheldbynon-residents.Millionsofnationalcurrency.1995-2014:EuropeanCentralBankStatisticalDataWarehouse.Variablecode:GFS.A.N.AT.W1.S13.S1.C.L.LE.GD.T.Z.XDC.T.F.V.N.T.Belgium:Consolidatedgrossdebtofthegeneralgovernment,heldbytherestoftheworld.Millionsofnationalcurrency.1990-1994:Bruegeldatasetonsovereignbondholdings.BasedondatafromtheEuropeanCentralBankStatisticalDataWarehouse.1995-2014:Governmentdebtheldbynon-residents.EuropeanCentralBankStatisticalDataWare-house.Variablecode:GFS.A.N.BE.W1.S13.S1.C.L.LE.GD.T.Z.XDC.T.F.V.N.TCanada:Portfolioinvestmentingovernmentbondsbyforeigners.Millionsofnationalcur-ECB Working Paper Series No 2255 / March 201960rency.1981-2014:StatisticsCanada,InternationalInvestmentPosition,Table376-0143.Denmark:Liabilitiesofthepublicsector(generalgovernment)heldbytherestoftheworld.Millionsofnationalcurrency.StatisticsDenmark,InternationalInvestmentPosition.1980-1997:annualdata.1999-2014:Finalquartertakenastheannualvalue.1998:Linearinterpo-lationbetweenthe1997and1999values.Finland:ConsolidatedGeneralGovernmentheldbytherestoftheworld.Millionsofnationalcurrency.1990-1994:Bruegeldatasetonsovereignbondholdings.BasedondatafromtheEuropeanCentralBankStatisticalDataWarehouse.1995-2014:GeneralGovernmentdebtheldbynon-residents.Millionsofnationalcurrency.Statis-ticsFinland,annualﬁnancialaccounts.Sumofbonds(AF32)andloans(AF4).France:Governmentdebtheldbynon-residents.Millionsofnationalcurrency.1995-2014:EuropeanCentralBankStatisticalDataWarehouse.Variablecode:GFS.A.N.FR.W1.S13.S1.C.L.LE.GD.T.Z.XDC.T.F.V.N.T.Germany:GeneralGovernmentFinancialstocksatnominalvalueheldbytherestoftheworld.Millionsofnationalcurrency.1990-1994:Bruegeldatasetonsovereignbondholdings.BasedondatafromtheEuropeanCentralBankStatisticalDataWarehouse.1995-2014:EuropeanCentralBankStatisticalDataWarehouse.Variablecode:GST.A.DE.N.B2000.MAL.B1300.SA.E.Ireland:Holdingsoflong-termgovernmentbondsbynon-residents.Millionsofnationalcur-rency.1978-2014:CentralBankofIreland,SecuritiesStatistics.Italy:GeneralGovernmentDebtheldbyNonresidents.Millionsofnationalcurrency.1988-2014:Bancad’Italia.Datastreamcode:ITNPD14@ITALY.ECB Working Paper Series No 2255 / March 201961Japan:SumofforeignholdingsofgovernmentT-bills,centralgovernmentsecurities,localgovernmentsecuritiesandpubliccorporationsecurities.Billionsofnationalcurrency.1982-2014:BankofJapanDatabase,FlowofFunds.Datacode:FF’FOF93FFYS500A310(govern-mentT-bills);FF’FOF93FFYS500A311(centralgovernmentsecurities);FF’FOF93FFYS500A312(localgovernmentsecurities);FF’FOF93FFYS500A313(publiccorporationsecurities).Netherlands:Consolidatedgrossdebtofthegeneralgovernment,heldbyRestoftheworld.Millionsofnationalcurrency.1990-1994:Bruegeldatasetonsovereignbondholdings.BasedondatafromtheEuropeanCentralBankStatisticalDataWarehouse.1995-2014:EuropeanCentralBankStatisticalDataWarehouse.Variablecode:GFS.A.N.NL.W1.S13.S1.C.L.LE.GD.T.Z.XDCRB1GQ.T.F.V.N.T.Portugal:Consolidatedgrossdebtofthegeneralgovernment,heldbyRestoftheworld.Mil-lionsofnationalcurrency.1995-2014:EuropeanCentralBankStatisticalDataWarehouse.Variablecode:GFS.A.N.PT.W1.S13.S1.C.L.LE.GD.T.Z.XDCRB1GQ.T.F.V.N.T.Spain:GeneralGovernmentsecuritiesheldbyRestoftheworld.Millionsofnationalcurrency.1989-2014:StatisticalBulletinofBankofSpain.FinancialAccounts:Securitiesholdingsbyinsti-tutionalsectors.Variablecode:BE313.29.Sweden:Governmentdebtheldbynon-residents.Millionsofnationalcurrency.1995-2014:EuropeanCentralBankStatisticalDataWarehouse.Variablecode:GFS.A.N.SE.W1.S13.S1.C.L.LE.GD.T.Z.XDC.T.F.V.N.T.UnitedKingdom:Long-termbondsofthecentralgovernment,heldbytherestoftheworld.Millionsofnationalcurrency.1987-2013:OﬃceofNationalStatistics.UnitedStates:Federalgovernment’streasurysecuritiesliabilities,heldbytherestoftheECB Working Paper Series No 2255 / March 201962world.Millionsofnationalcurrency.1978-2014:FederalReserveBankofSt.LouisFREDdatabase.FREDseries:ROWTSEQ027S.DInstrumentrelevance:InternationalPanelAsfortheU.S.,weuseinstrumentalvariableregressionstoexaminehowforeignholdingsofpublicdebtaﬀectthesizeofﬁscalmultipliersinourpanelofadvancedeconomies.Wereportheretheﬁrst-stageregressionresults,relatedtothe(second-stage)regressionresultsdiscussedinSection6.TheresultsinTablesA.6andA.7correspondtotheestimationoftheinstrumentsonthecyclically-adjustedprimarybalanceandthecyclically-adjustedprimarybalanceinteractedwithourmeasureofforeignsharerespectively.WeusethenarrativeﬁscalshockproducedbyGuajardoetal.(2014)andsubsequentlyupdatedbyKataryniukandValles(2015)toinstrumentgovernmentspending.Theﬁrst-stageresultsshowthattheinteractionoftheﬁscalshocksandforeignsharearestatisticallysigniﬁcantinbothregressions.[INSERTTABLEA.6][INSERTTABLEA.7]Toassesstherelevanceofourinstruments,wefollowourapproachfortheU.S.andusetheteststatisticsfromSandersonandWindmeijer(2016).TheresultsfortheweakandunderidentﬁicationtestsareinTablesA.8andA.9respectively.SandersonandWindmeijer(2016)notethattheStockandYogo(2005)criticalvaluescanbeusedfortheirconditionalF-statistics.Forourcaseoftwoendogenousregressorsandtwoinstruments,thecriticalvaluesfortheStockandYogo(2005)weakIDtestare:•10%maximalIVsize:7.03•15%maximalIVsize:4.48•20%maximalIVsize:3.95•25%maximalIVsize:3.63[INSERTTABLEA.8]ECB Working Paper Series No 2255 / March 201963[INSERTTABLEA.9]Takentogether,theresultsinTablesA.8andA.9showthatourinstrumentsarerelevant.Wethereforebelievetheyaresuitableforuseintheempiricalanalysis.ECB Working Paper Series No 2255 / March 201964TableA1:U.S.governmentspendinginstrumentst+1t+2t+3t+4t+5t+6t+7t+8Newsshockt-0.000.050.13∗∗0.25∗∗0.44∗∗∗0.66∗∗∗0.89∗∗∗1.11∗∗∗(0.02)(0.03)(0.06)(0.10)(0.16)(0.23)(0.29)(0.35)Newsshockt·Foreignsharet−1-0.01-0.22-0.50-1.00∗-1.79∗∗-2.65∗∗-3.49∗∗-4.29∗∗(0.07)(0.17)(0.33)(0.54)(0.83)(1.17)(1.49)(1.76)BPshockt1.95∗∗∗2.99∗∗∗4.03∗∗∗5.12∗∗∗6.08∗∗∗7.15∗∗∗8.08∗∗∗8.97∗∗∗(0.08)(0.21)(0.33)(0.50)(0.75)(1.04)(1.39)(1.75)BPshockt·Foreignsharet−10.670.651.032.294.265.597.399.92(0.52)(1.09)(1.84)(2.93)(4.49)(6.13)(8.05)(10.05)Observations254254253252251250249248Notes:The(defense)newsshocksarefromRameyandZubairy(2018).TheBPshocksaretheresidualsfromourestimationofastructuralVARalaBlanchardandPerotti(2002).BothshocksarenormalizedbypotentialGDP.Standarderrorsinparentheses.∗p<0.10,∗∗p<0.05,∗∗∗p<0.01ECB Working Paper Series No 2255 / March 201965TableA2:InteractedU.S.governmentspendingin-strumentst+1t+2t+3t+4t+5t+6t+7t+8Newsshockt-0.01∗-0.01-0.01-0.02-0.02-0.02-0.02-0.02(0.00)(0.01)(0.01)(0.02)(0.02)(0.03)(0.03)(0.04)Newsshockt·Foreignsharet−10.03∗∗0.06∗0.11∗0.14∗0.130.160.200.25(0.01)(0.03)(0.06)(0.08)(0.09)(0.12)(0.15)(0.17)BPshockt-0.000.010.01-0.00-0.000.000.01-0.01(0.01)(0.02)(0.03)(0.04)(0.05)(0.07)(0.09)(0.11)BPshockt·Foreignsharet−12.06∗∗∗2.97∗∗∗3.95∗∗∗5.21∗∗∗6.39∗∗∗7.59∗∗∗8.76∗∗∗10.22∗∗∗(0.08)(0.17)(0.28)(0.39)(0.50)(0.70)(0.89)(1.10)Observations254254253252251250249248Notes:ThedependentvariableisU.S.governmentspendinginteractedwithourmeasureofforeignshare.The(defense)newsshocksarefromRameyandZubairy(2018).TheBPshocksaretheresidualsfromourestimationofastructuralVARalaBlanchardandPerotti(2002).BothshocksarenormalizedbypotentialGDP.Standarderrorsinparentheses.∗p<0.10,∗∗p<0.05,∗∗∗p<0.01ECB Working Paper Series No 2255 / March 201966TableA3:Weakidentiﬁcationtest:Kleibergen-PaapWaldrkFstatistichU.S.governmentspendingInteractedU.S.governmentF-statisticspendingF-statistic1624.0369.92235.181.83149.561.74127.148.65108.645.3690.237.6777.532.8866.628.9957.925.91049.323.11143.421.51237.719.81334.714.41433.110.51531.27.61628.96.6Notes:ThethirdcolumnisU.S.governmentspendinginteractedwithourmeasureofforeignshare.WeuseboththedefensenewsandtheBlanchard-Perottishocksasinstruments.ECB Working Paper Series No 2255 / March 201967TableA4:SandersonandWindmeijer(2016)weakidentiﬁcationteststatisticshU.S.governmentInteractedU.S.governmentU.S.governmentInteractedU.S.governmentspendingF-statisticspendingF-statisticspendingp-valuespendingp-value1483.5428.70.0000.0002117.9363.60.0000.000387.1287.70.0000.000469.9255.90.0000.000563.7192.20.0000.000653.6134.40.0000.000746.9103.40.0000.000842.075.00.0000.000937.866.90.0000.0001033.961.80.0000.0001131.050.80.0000.0001227.322.60.0000.0001326.718.70.0000.0001425.914.40.0000.0001525.310.70.0000.0001624.38.90.0000.000Notes:ThesecondandfourthcolumnsareU.S.governmentspendinginteractedwithourmeasureofforeignshare.WeuseboththedefensenewsandtheBlanchard-Perottishocksasinstruments.Thep-valuesarefromtheﬁrst-stageregressionsandassumei.i.d.errors.ECB Working Paper Series No 2255 / March 201968TableA5:SandersonandWindmeijer(2016)underidentiﬁcationchi-squaredstatisticshU.S.governmentInteractedU.S.governmentU.S.governmentInteractedU.S.governmentchi-squaredstatisticspendingchi-squaredstatisticspendingp-valuespendingp-value11666.91478.20.0000.0002406.71253.60.0000.0003300.4992.50.0000.0004241.3883.50.0000.0005219.9663.90.0000.0006185.5464.40.0000.0007162.1357.70.0000.0008145.4259.50.0000.0009131.0231.80.0000.00010117.4214.10.0000.00011107.6176.30.0000.0001294.678.40.0000.0001392.664.90.0000.0001490.250.00.0000.0001588.137.10.0000.0001684.730.90.0000.000Notes:ThesecondandfourthcolumnsareU.S.governmentspendinginteractedwithourmeasureofforeignshare.WeuseboththedefensenewsandtheBlanchard-Perottishocksasinstruments.Thep-valuesarefromtheﬁrst-stageregressionsandassumei.i.d.errors.ECB Working Paper Series No 2255 / March 201969TableA6:Internationalpanelﬁscalvariableinstruments(1)(2)(3)(4)Yeart+1Yeart+2Yeart+3Yeart+4Narrativeshockt0.73∗∗∗0.501.29∗∗∗1.18∗∗(0.17)(0.39)(0.41)(0.49)Narrativeshockt·Foreignsharet−1-0.451.03-0.51-0.45(0.31)(0.81)(0.96)(1.03)Observations405387369352Notes:Thedependent(ﬁscal)variableisthecyclically-adjustedprimarybalance.TheshocksarefromGuajardoetal.(2014),updatedbyKataryniukandValles(2015).Themagnitudesoftheshocksreﬂecttheexpectedfuturebudgetaryimpactoftheconsolidations,asapercentageofGDP.Standarderrorsinparentheses.∗p<0.10,∗∗p<0.05,∗∗∗p<0.01ECB Working Paper Series No 2255 / March 201970TableA7:Internationalpanelinteractedﬁscalvariableinstruments(1)(2)(3)(4)Yeart+1Yeart+2Yeart+3Yeart+4Narrativeshockt0.12-0.17-0.06-0.05(0.08)(0.11)(0.15)(0.14)Narrativeshockt·Foreignsharet−10.151.57∗∗∗1.31∗∗1.24∗∗(0.23)(0.36)(0.56)(0.49)Observations405387369352Notes:Thedependent(ﬁscal)variableistheﬁscalvariableisthecyclically-adjustedprimarybalanceinteractedwithourmeasureofforeignshare.TheshocksarefromGuajardoetal.(2014),updatedbyKataryniukandValles(2015).Themagnitudesoftheshocksreﬂecttheexpectedfuturebudgetaryimpactoftheconsolidations,asapercentageofGDP.Standarderrorsinparentheses.∗p<0.10,∗∗p<0.05,∗∗∗p<0.01ECB Working Paper Series No 2255 / March 201971TableA8:Internationalpanel:Sanderson-Windmeijerchi-squarestatisticsandp-valueshFiscalvariableInteractedﬁscalvariableFiscalvariableInteractedﬁscalvariablechi-squaredstatisticchi-squaredstatisticp-valuep-value112.24.30.0010.05126.413.30.0180.001320.519.80.0000.000413.118.80.0010.000Notes:Thedependent(ﬁscal)variableisthecyclically-adjustedprimarybalance.Thesecondandfourthcolumnsaretheﬁscalvariableinteractedwithourmeasureofforeignshare.TheshocksarefromGuajardoetal.(2014),updatedbyKataryniukandValles(2015).Thep-valuesarefromtheﬁrst-stageregressionsandassumei.i.d.errors.ECB Working Paper Series No 2255 / March 201972TableA9:Internationalpanel:Sanderson-WindmeijerFstatisticsandp-valueshFiscalvariableInteractedﬁscalvariableFiscalvariableInteractedﬁscalvariableF-statisticF-statisticp-valuep-value110.93.80.0010.05125.711.80.0180.001318.217.60.0000.000411.616.60.0010.000Notes:Thedependent(ﬁscal)variableisthecyclically-adjustedprimarybalance.Thesecondandfourthcolumnsaretheﬁscalvariableinteractedwithourmeasureofforeignshare.TheshocksarefromGuajardoetal.(2014),updatedbyKataryniukandValles(2015).Thep-valuesarefromtheﬁrst-stageregressionsandassumei.i.d.errors.ECB Working Paper Series No 2255 / March 201973Acknowledgements 

We thank Inês Martins, Mattia Picarelli, and Donghai Zhang for excellent research assistance. We received valuable comments from 
Neele Balke, Pablo Burriel, Giancarlo Corsetti, Sergio de Ferra, Johannes Pfeifer, Morten Ravn, Dmitriy Sergeyev, and participants at 
various conferences and seminars. Broner and Martin acknowledge support from the Spanish Ministry of Economy, Industry and 
Competitiveness through the I+D Excelencia grant (grant ECO2016-79823-P) and through the Severo Ochoa Programme for Centres of 
Excellence in R&D grant (SEV-2015-0563); from the Generalitat de Catalunya through the CERCA Programme grant (2014 SGR-830); 
and from the Barcelona GSE Research Network. Martin also acknowledges support from the European Research Council under EU 
Seventh Framework Programme (FP7/2007-2013) ERC Consolidator Grant (615651-MacroColl). These are the views of the authors 
and not necessarily those of the ECB or the ESM. 

Fernando Broner 
CREi, Universitat Pompeu Fabra, and Barcelona GSE, Barcelona, Spain; email: fbroner@crei.cat 

Daragh Clancy 
European Stability Mechanism, Luxembourg, Luxembourg; email: d.clancy@esm.europa.eu 

Aitor Erce 
European Stability Mechanism, Luxembourg, Luxembourg; email: a.erce@esm.europa.eu 

Alberto Martín 
European Central Bank, Frankfurt am Main, Germany; CREi, and Barcelona GSE, Barcelona, Spain;  
email: alberto.martin@ecb.europa.eu 

© European Central Bank, 2019 

Postal address  60640 Frankfurt am Main, Germany 
Telephone 
Website 

+49 69 1344 0 
www.ecb.europa.eu 

All rights reserved. Any reproduction, publication and reprint in the form of a different publication, whether printed or produced 
electronically, in whole or in part, is permitted only with the explicit written authorisation of the ECB or the authors.  

This paper can be downloaded without charge from www.ecb.europa.eu, from the Social Science Research Network electronic library or 
from RePEc: Research Papers in Economics. Information on all of the papers published in the ECB Working Paper Series can be found 
on the ECB’s website. 

PDF 

ISBN 978-92-899-3517-3 

ISSN 1725-2806 

doi:10.2866/109192 

QB-AR-19-036-EN-N