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.