Decomposing Fiscal Multiplier Heterogeneity Under Sovereign Debt Overhang: A Threshold Panel Approach for Emerging Market Economies

Abstract

Persistent sovereign debt overhang constrains the effectiveness of discretionary fiscal policy in emerging market economies (EMEs), yet the precise mechanisms driving multiplier heterogeneity remain empirically underidentified. This study employs a non-linear threshold panel vector autoregression (TPVAR) framework across 34 EMEs over 1995–2022 to decompose output multipliers conditional on debt-to-GDP regimes, exchange rate flexibility, and financial openness. Instrumental variable identification exploits Blanchard–Perotti restrictions augmented by Jordà local projections. Results indicate that fiscal multipliers compress sharply—averaging 0.31 in high-debt regimes versus 0.89 in low-debt states—driven primarily by sovereign risk premia transmission and private investment crowding-out. Heterogeneity is further amplified by capital account openness. Findings carry direct implications for debt sustainability frameworks and counter-cyclical fiscal space calibration under post-pandemic consolidation pressures.