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.
This research is supported by the National Science Foundation grant numbers SES-1851717 and SES-2042691. We thank our discussants Oleg Itskhoki and Linda Tesar as well as Luigi Bocola, Larry Christiano, Marty Eichenbaum, Pierre-Olivier Gourinchas, Calvin He, Kilian Huber, Anders Humlum, Sebnem Kalemli-Ozcan, Greg Kaplan, Rohan Kekre, Thibaut Lamadon, Elisa Rubbo, Daan Struyven, and Christian Wolf for helpful comments. We thank Agustin Barboza for excellent research assistance. We thank Erica Deadman, Peter Ganong, Fiona Greig and Pascal Noel for sharing JPMorgan Chase Institute data. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Forthcoming: Excess Savings and Twin Deficits: The Transmission of Fiscal Stimulus in Open Economies , Rishabh Aggarwal, Adrien Auclert, Matthew Rognlie, Ludwig Straub. in NBER Macroeconomics Annual 2022, volume 37 , Eichenbaum, Hurst, and Ramey. 2022