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

Abstract

We study the effects of debt-financed fiscal transfers in a general equilibrium, heterogeneousagent 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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