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

Three salient facts have emerged in the world economy since 2020. First, a large increase in private savings around the world, especially in the United States. Second, an increase in the current account deficit in the United States, with a corresponding surplus in the rest of the world. Third, a large increase in the fiscal deficit around the world, especially in the United States. In this paper, we argue that the third fact caused the first two. We do so in the context of a many-country heterogeneous-agent model in which deficit-financed fiscal transfers simultaneously lead to a large increase in private savings (“excess savings”) and persistent current account deficits (“twin deficits”). Our model is also consistent with the distribution of U.S. checking account balances over this period: in the model and the data, a few quarters after a fiscal transfer, most of the excess savings are held by the rich. At this point, there is still a contribution to demand from spending down excess savings, but it is limited by the low marginal propensities to consume of the rich.