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.
Excess Savings and Twin Deficits: The Transmission of Fiscal Stimulus in Open Economies, Rishabh Aggarwal, Adrien Auclert, Matthew Rognlie, Ludwig Straub. in NBER Macroeconomics Annual 2022, volume 37, Eichenbaum, Hurst, and Ramey. 2023