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Global Savings and Global Investment: The Transmission of Identified Fiscal Shocks

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  • James Feyrer
  • Jay C. Shambaugh

Abstract

This paper examines the effect of exogenous shocks to savings on world capital markets. Using the exogenous shocks to US tax policy identified by Romer & Romer, we trace the impact of an exogenous shock to savings through the income accounting identities of the US and the rest of the world. We find that exogenous tax increases are only partially offset by changes in private savings (Ricardian equivalence is not complete). We also find that only a small amount of the resulting change in US saving is absorbed by increased domestic investment (contrary to Feldstein & Horioka). Almost half of the fiscal shock is transmitted abroad as an increase in the US current account. Positive shocks to US savings generate current account deficits and increases in investment in other countries in the world. We cannot reject that the shock is uniformly transmitted across countries with different currency regimes and different levels of development. The results suggest highly integrated world capital markets with rapid adjustment. In short we find that the US acts like a large open economy and the world acts like a closed economy.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15113.

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Date of creation: Jun 2009
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Handle: RePEc:nbr:nberwo:15113

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Cited by:
  1. International Monetary Fund, 2010. "Fiscal Policy and the Current Account," IMF Working Papers 10/121, International Monetary Fund.
  2. Gancho Todorov Ganchev, 2010. "The twin deficit hypothesis: the case of Bulgaria," Financial Theory and Practice, Institute of Public Finance, vol. 34(4), pages 357-377.
  3. Ippei Fujiwara & Kozo Ueda, 2010. "The Fiscal Multiplier and Spillover in a Global Liquidity Trap," IMES Discussion Paper Series 10-E-03, Institute for Monetary and Economic Studies, Bank of Japan.
  4. Philip R. Lane, 2009. "External Imbalances and Macroeconomic Policy in New Zealand," The Institute for International Integration Studies Discussion Paper Series iiisdp376, IIIS.
  5. Philip Lane, 2009. "Some Lessons for Fiscal Policy from the Financial Crisis," The Institute for International Integration Studies Discussion Paper Series iiisdp334, IIIS.

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