DP17397 Excess Savings and Twin Deficits: The Transmission of Fiscal Stimulus in Open Economies

Author(s): Rishabh Aggarwal, Adrien Auclert, Matthew Rognlie, Ludwig Straub
Publication Date: June 2022
JEL(s): E62, F32, F41
Programme Areas: International Macroeconomics and Finance, Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=17397

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.