We study the effects of debt-financedfiscal transfers in a general equilib-rium, heterogeneous-agent model of the world economy. In the long run,increases in government debt anywhere raise the world interest rate andincrease private wealth everywhere. In the short run, a country with alarger-than-averagefiscal deficit experiences both a large increase in pri-vate savings (“excess savings”) and a small but persistent current accountdeficit (a slow-motion“twin deficit”). These patterns are consistent withthe evolution of the world’s balance of payments since the beginning ofthe COVID-19 pandemic.
ASJC Scopus subject areas
- Economics and Econometrics