Fiscal policy and the substitution between national and foreign savings

Philip Arestis and Marco Flávio Resende

Journal of Post Keynesian Economics, 2015, vol. 37, issue 3, 436-458

Abstract: This paper addresses the relationship between fiscal policy, the real exchange rate, national and foreign savings, and investment. It shows how the mechanism of the finance–investment–saving–funding Keynesian circuit (FISF) works in open economies. This is undertaken in an attempt to demonstrate that real exchange rate changes affect the FISF circuit in that they trigger the substitution between national and foreign savings. Thus, domestic investment causes savings, but the distribution of aggregate savings between its national and foreign components depends on the level of the real exchange rate. Finally, we show that if government budget deficits change relative prices in an economy, this worsens the current account balance by triggering substitution between national and foreign savings. Thus, the constraint on investment (and on growth) that can emanate from this process is one that emerges from external forces.

Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:mes:postke:v:37:y:2015:i:3:p:436-458

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DOI: 10.1080/01603477.2015.1000168

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