The European Central Bank (ECB) has published a working paper finding that government spending financed with debt of shorter maturity generates larger output gains than spending financed with longer maturity debt. Using postwar U.S. data, the research estimates output multipliers generally above one under shorter maturity financing and below one under longer maturity financing. The difference mainly reflects private consumption, which increases under shorter maturity financing but shows no comparable response under longer maturity financing. The baseline empirical analysis covers the third quarter of 1954 through the fourth quarter of 2015. After four quarters, estimated cumulative output multipliers were 1.85 for shorter maturity financing and 0.42 for longer maturity financing, although the latter estimate was statistically insignificant. Two empirical approaches support the broader finding, which holds across alternative sample periods and after controlling for debt levels, wages and interest rates. A model calibrated to U.S. data explains the gap through the liquidity and safety services provided by debt with shorter maturities. Increasing its supply helps households meet unexpected spending needs and reduces precautionary saving, supporting consumption. The difference between financing methods persists across alternative monetary and fiscal policy regimes, but its magnitude depends on policy responses. Under a standard Taylor rule, the gap narrows and both output multipliers fall below one, unlike the baseline specification with interest rate smoothing.
ECB publishes research linking shorter debt maturities to larger government spending multipliers
A European Central Bank working paper finds that government spending multipliers in postwar U.S. data generally exceed one with shorter maturity debt financing and fall below one with longer maturity financing. Stronger private consumption explains most of the difference, with the paper’s model linking this response to additional liquid and safe assets that ease spending constraints and reduce precautionary saving. The gap persists across the policy regimes examined, although its size varies with monetary and fiscal policy settings.