1. Insulation Impossible: Fiscal Spillovers in a Monetary Union Banco de España Conference “Interactions between monetary and fiscal policies” Madrid, 25-26 February 2010

2. Discussion impossible… by Evi Pappa

3. To start with Very elegant paper Well written In contrast with recently developed models uses minimum number of frictions: one

4. 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.

5. A timely issue

6. 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

7. 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

8. 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.

9. Today´s 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

10. 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 spillovers=> shocks in state debt should decrease significantly regional wages

11. SOUTHWEST LAAROKNM TX

12. MIDEAST OHWVPAMA

13. FARWEST CA WAOR NV

14. 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)

15. 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." Robert Lucas 1980 To conclude….