Discussion of Cardoso and Doménech - Guido Ascari, University of Pavia Discussion of “On Ricardian Equivalence and Twin Divergence: The Spanish Experience in the 2009 Crisis” by M. Cardoso and R. Doménech Guido Ascari, University of Pavia Banco de España Conference “Interactions between monetary and fiscal policies” Madrid, February 2010

Discussion of Cardoso and Doménech - Guido Ascari, University of Pavia Standard Structure  Praise of the paper  Summary of main results  Try to say something clever

Discussion of Cardoso and Doménech - Guido Ascari, University of Pavia Praise  Very nice paper  Very rich model: REMS (Rational Expectations Model of the Spanish economy). Big-scale DSGE NK model with:  SOE in a monetary union  Two agents (credit constraints)  Search and matching frictions on the labor market  Public capital and energy in the production function  Public debt, various distortionary taxes and spending (transfers, public expenditure/investment)

Discussion of Cardoso and Doménech - Guido Ascari, University of Pavia  Motivation: assess the effects of fiscal expansions in SE  3 exercises: increase in public consumption, public investment and labor taxes

Discussion of Cardoso and Doménech - Guido Ascari, University of Pavia Main result Fiscal expansions cause only minor CA deficits  similar behaviour of -Saving -private savings only partially offset the movement in public savings, because Ricardian equivalence does not hold by construction - Investment (crowding-out)

Discussion of Cardoso and Doménech - Guido Ascari, University of Pavia Try to say something clever  Motivation  Model  Policy and results

Discussion of Cardoso and Doménech - Guido Ascari, University of Pavia Motivation  Explain the twin divergence observed during the recent crisis  “However, with the current economic crisis, the […] public budget surplus has turned into a huge deficit, […] the households saving rate has increased enormously,[…] and the current account deficit, […] is correcting very quickly.”  Current economic crisis is having big effects on Spain => great policy relevance  Subprime crisis…housing sector (boom and bust)…hh debt  Default risk and toxic assets…stock mkt and financial sector  Then banking crisis  Then real effects from “credit crunch”  There is nothing in the model that relates to the crisis: no housing, no borrowing and lending, no credit, no banks

Discussion of Cardoso and Doménech - Guido Ascari, University of Pavia Model The spread  It maybe usual way “to close small open economy model”  Opposite direction to the current concerns regarding the PIIGS  especially relevant if one looks at the effects of fiscal policy and thus changes in national debt  …and only domestic residents hold domestic public debt

Discussion of Cardoso and Doménech - Guido Ascari, University of Pavia Model The labor contract: efficient Nash bargaining “representative worker” surplus firm surplus Earning premium of employment over unemployment for a ROT and an optimizer

Discussion of Cardoso and Doménech - Guido Ascari, University of Pavia Model Public Investment  Increase in public investment => what happens to private savings?  Role of complementarity between the two capitals, i.e., Role of the assumption: public capital enters directly the production function?...  And what if foreign countries can finance public investment?

Discussion of Cardoso and Doménech - Guido Ascari, University of Pavia Policy and Results Assumption about the fiscal policy reaction function …here is based on lump-sum transfer  realism??  Why not exploit the rich structure of distortionary taxes? which taxes gives the bigger effects?  Corsetti et al. (2009)…importance of spending reversal

Discussion of Cardoso and Doménech - Guido Ascari, University of Pavia Policy and Results  The role of policy mix….(could not find TR parameter)  robustness on monetary policy rule and parameters  it may be less important in a monetary union, given the small weight of the Spanish economy in EMU inflation  on the other hand, seems very accommodative, because the rate do not change  Crisis: the lower bound and the fiscal multiplier (Christiano et al., 2009)