Working Paper: NBER ID: w15113
Authors: 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.
Keywords: Fiscal shocks; Global savings; Investment; Current account
JEL Codes: E2; E21; E22; F15; F32; F36; F41; F42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| exogenous tax increases in the US (H29) | increase in the US current account (F32) |
| exogenous tax increases in the US (H29) | current account deficit abroad (F32) |
| exogenous tax increases in the US (H29) | changes in investment abroad (F21) |
| increase in the US current account (F32) | changes in investment abroad (F21) |
| US fiscal shocks (E62) | significant impact on investment in other countries (F69) |
| changes in US savings (E21) | equivalent domestic investment adjustments (F21) |