Insulation Impossible: Fiscal Spillovers in a Monetary Union

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Insulation Impossible Fiscal Spillovers in a
Monetary Union

• Banco de España Conference
• Interactions between monetary and fiscal
  policies
• Madrid, 25-26 February 2010

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Discussion impossible

• by Evi Pappa

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To start with

• Very elegant paper
• Well written
• In contrast with recently developed models uses
  minimum number of frictions one

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The message of the paper

• In the presence of frictions reserve
  requirement the fiscal policy decisions of one
  region will spillover to other regions
• Monetary policy can do little to insulate one
  region from another.

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A timely issue
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But different spillovers

• crowding out of capital from the increase in debt
  presence of RR allocates extra savings in money
  rather than capital after increase in b.
• Reduction in wage rate
• Increase in real interest rate

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The literature

• Dixit and Lambertini (2001,2003)
• fiscal policy may create coordination failures
  between the central bank and regional fiscal
  authorities
• Beetsma and Bovenberg (1998) and Beetsma and
  Uhlig (1999)
• debt bias originating from government myopia
• Uhlig (2002)
• free-riding problems arising from the
  interaction between many fiscal and one monetary
  authority

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Evidence of spillover effects

• Evans (1988) no effects of deficits on the
  current account balances for Canada, France,
  Germany, the UK, and the US.
• Canova and Pappa (2007), spillover of fiscal
  shocks in relative prices in US states
• Beetsma, Giuliodori and Klaassen (2009), positive
  spillovers of fiscal policy on trade in the EU.
• Gwik-Wieland and Faia et al.

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Todays discussion Testing for spillovers of
debt in real wages

• Difficulties in checking for Ricardian
  equivalence
• So, check for spillovers on real wages
• Annual US data (BEA / BLS) on GSP, GG, TR, state
  and regional employment and state and regional
  wages and state debt.
• 3 regions Mideast, Southwest and Farwest

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Debt shock

• VAR Choleski with state debt, GSP, state
  employment, state wage and regional wages
• Control variables, US GDP, FFR, US inflation, oil
  prices, exchange rate with RoW, regional
  employment, government spending and tax revenues
• Estimation through Bayesian techniques, sample
  size 1969-2000
• If spilloversgt shocks in state debt should
  decrease significantly regional wages

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SOUTHWEST
LA
AR
OK
NM
TX
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MIDEAST
OH
WV
PA
MA
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FARWEST
CA
NV
WA
OR
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Summary of empirical exercise

• Data confirm the presence of spillover effects of
  increases in debt on real wages
• However, such spillovers effects are not always
  negative as the theory suggests.
• And not always significant (southwest region)

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Any model that is well enough articulated to give
clear answers to the questions we put to it will
necessarily be artificial, abstract, patently
"unreal."
To conclude.

• Robert Lucas 1980