Global Savings and Global Investment: The Transmission of Identified Fiscal Shocks

30 Pages Posted: 30 Jun 2009 Last revised: 28 Jul 2009

See all articles by James Feyrer

James Feyrer

Dartmouth College - Department of Economics; National Bureau of Economic Research (NBER)

Jay Shambaugh

Dartmouth College - Department of Economics; Georgetown University - Department of Strategy/Economics/Ethics/Public Policy

Date Written: June 2009

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.

Suggested Citation

Feyrer, James and Shambaugh, Jay, Global Savings and Global Investment: The Transmission of Identified Fiscal Shocks (June 2009). NBER Working Paper No. w15113. Available at SSRN: https://ssrn.com/abstract=1426749

James Feyrer (Contact Author)

Dartmouth College - Department of Economics ( email )

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National Bureau of Economic Research (NBER) ( email )

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Jay Shambaugh

Dartmouth College - Department of Economics ( email )

309 Rockefeller Hall
Hanover, NH 03755
United States
603-646-9345 (Phone)
603-646-2122 (Fax)

HOME PAGE: http://www.dartmouth.edu/~economic/faculty/Shambaugh/

Georgetown University - Department of Strategy/Economics/Ethics/Public Policy

Washington, DC 20057
United States

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