Fiscal multipliers and twin deficits: How everything fits together
The national income accounting identities reveal that current account equals the gap between total domestic saving and investment. The public-sector deficit measures public dis-saving. The result of the ‘twin deficits’ (government and current account) to a fiscal shock is thus associated with how private saving and investment choice respond to the shock.
Specifically, private agents’ behaviour depend, inter alia, on what fiscal shocks are perceived. These perceptions will normally rely upon the economic environment – especially debt sustainability.