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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.

Rishabh Aggarwal
Adrien Auclert
Matthew Rognlie
Ludwig Straub
Publication Date
June, 2022