Question

twin deficit,what inference can we make about the difference between the country’s private saving and domestic investment?In particular, explain whether private saving would be bigger than, or equal to, or smaller than domestic investment? Or could the difference be ambiguous?

Answer 1

The relationship between a country's private saving and domestic investment in the context of the twin deficit is intricate and can vary based on multiple factors.

What happens when there is a fiscal deficit

When a country experiences a fiscal deficit, private saving might be smaller than domestic investment as government borrowing reduces overall national saving.

Conversely, a fiscal surplus could lead to private saving surpassing domestic investment, potentially bolstered by increased confidence in the economy.

However, the interplay between private saving and domestic investment is influenced by diverse elements such as economic conditions, government policies, interest rates.