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

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  • Auclert, Adrien
  • Aggarwal, Rishabh
  • Rognlie, Matthew
  • Straub, Ludwig

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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  • Auclert, Adrien & Aggarwal, Rishabh & Rognlie, Matthew & Straub, Ludwig, 2022. "Excess Savings and Twin Deficits: The Transmission of Fiscal Stimulus in Open Economies," CEPR Discussion Papers 17397, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:17397
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    Cited by:

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    2. Xiaoshan Chen & Spyridon Lazarakis & Petros Varthalitis, 2023. "Debt targets and fiscal consolidation in a two-country HANK model for the Euro Area," Working Papers 374162075, Lancaster University Management School, Economics Department.
    3. Xiaoshan Chen & Spyridon Lazarakis & Petros Varthalitis, 2023. "Debt targets and fiscal consolidation in a two country HANK model: the case of Euro Area," Working Papers 2023_02, Durham University Business School.

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    More about this item

    Keywords

    Distribution;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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