Working Paper: NBER ID: w30185
Authors: Rishabh Aggarwal; Adrien Auclert; Matthew Rognlie; Ludwig Straub
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.
Keywords: Fiscal Policy; Twin Deficits; Excess Savings; Open Economies; General Equilibrium
JEL Codes: E21; E62; F32; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increases in government debt (H63) | rise in world interest rates (E43) |
| increases in government debt (H63) | increase in private wealth (D14) |
| rise in world interest rates (E43) | increase in private wealth (D14) |
| larger-than-average fiscal deficit (H69) | significant rise in private savings (D14) |
| larger-than-average fiscal deficit (H69) | persistent current account deficit (F32) |
| increase in private savings (D14) | delayed effect on current accounts (F32) |
| depletion of excess savings (E21) | more pronounced current account effects over time (F32) |