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Fiscal policy and the substitution between national and foreign savings

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  • Philip Arestis
  • Marco Flávio Cunha Resende

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.

Suggested Citation

  • Philip Arestis & Marco Flávio Cunha Resende, 2015. "Fiscal policy and the substitution between national and foreign savings," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 37(3), pages 436-458, July.
    • Handle: RePEc:mes:postke:v:37:y:2015:i:3:p:436-458
    DOI: 10.1080/01603477.2015.1000168
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    References listed on IDEAS

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    1. Sheila C. Dow, 1993. "Money And The Economic Process," Books, Edward Elgar Publishing, number 147.
    2. Vasilev, Aleksandar & Maksumov, Rashid, 2010. "Critical analysis of Chapter 23 of Keynes’s Notes on Mercantilism in The General Theory of Employment, Interest and Money (1936)," EconStor Research Reports 155318, ZBW - Leibniz Information Centre for Economics.
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    Cited by:

    1. Elisa Van Waeyenberge & Hannah Bargawi, 2016. "Financing Economic Development. Theoretical Debates and Empirical Trends," Working papers wpaper139, Financialisation, Economy, Society & Sustainable Development (FESSUD) Project.
    2. Duy-Tung Bui, 2018. "Fiscal policy and national saving in emerging Asia: challenge or opportunity?," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 8(2), pages 305-322, August.

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