Discussion paper

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

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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Citation

Aggarwal, R, A Auclert, M Rognlie and L Straub (eds) (2022), “DP17397 Excess Savings and Twin Deficits: The Transmission of Fiscal Stimulus in Open Economies”, CEPR Press Discussion Paper No. 17397. https://new.cepr.org/publications/dp17397