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Title: Excess Savings and Twin Deficits: The Transmission of Fiscal Stimulus in Open Economies

Author(s): Rishabh Aggarwal, Adrien Auclert, Matthew Rognlie and Ludwig Straub

Publication Date: June 2022

Keyword(s):

Programme Area(s): International Macroeconomics and Finance and Monetary Economics and Fluctuations

Abstract: We study the effects of debt-financed fiscal transfers in a general equilibrium, heterogeneous-agent model of the world economy. In the long run, increases in government debt anywhere raise the world interest rate and increase private wealth everywhere. In the short run, a country with a larger-than-average fiscal deficit experiences both a large increase in private savings ("excess savings") and a small but persistent current account deficit (a slow-motion "twin deficit"). These patterns are consistent with the evolution of the world's balance of payments since the beginning of the Covid pandemic.

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Bibliographic Reference

Aggarwal, R, Auclert, A, Rognlie, M and Straub, L. 2022. 'Excess Savings and Twin Deficits: The Transmission of Fiscal Stimulus in Open Economies'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=17397