Insulation Impossible: Fiscal
Spillovers in a Monetary Union
Banco de España Conference
“Interactions between monetary and
fiscal policies”
Madrid, 25-26 February 2010
Discussion impossible…
by Evi Pappa
To start with
• Very elegant paper
• Well written
• In contrast with recently developed models
uses minimum number of frictions: one
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.
A timely issue
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
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
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.
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
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
SOUTHWEST
AR
LA
NM
OK
TX
Impuls e r es pons es to debt s hoc k
Impuls e res pons es to debt s hoc k
0.25
Impu ls e res po ns es to debt s hoc k
Impuls e res pons es to debt s hoc k
Impulse responses to debt shock
state wage
0.12
state wage
state wage
0.18
0.00
state wage
0.1
0.12
-0.0
0.06
-0.1
state wage
0.48
0.40
0.00
-0.12
0.32
0.00
-0.2
-0.24
0.24
-0.06
-0.3
-0.25
-0.36
0.16
-0.12
-0.4
-0.18
-0.48
0.08
-0.5
-0.50
-0.24
-0.60
0.00
-0.6
-0.30
-0.72
-0.75
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
1
2
3
4
5
7
8
9
10
11
12
13
14
15
0
1
2
3
4
5
6
horizon
regional wage
1.0
6
8
9
10
11
12
13
14
0
15
1
2
3
4
5
6
7
8
9
10
11
12
13
14
0
15
5
10
15
10
15
horizon
horizon
regional wage
0.75
regional wage
0.8
0.16
0.5
7
horizon
regional wage
0.32
-0.08
-0.7
-0.36
0
15
horizon
regional wage
0.25
0.6
0.50
0.00
0.00
0.0
0.4
-0.16
0.25
-0.5
0.2
-0.32
-0.25
-0.48
-1.0
0.0
0.00
-0.64
-0.2
-1.5
-0.80
0
1
2
3
4
5
6
7
horizon
8
9
10
11
12
13
14
15
-0.50
-0.25
0
-0.4
-2.0
0
-0.96
0
1
2
3
4
5
6
7
horizon
8
9
10
11
12
13
14
15
1
2
3
4
5
6
7
horizon
8
9
10
11
12
13
14
15
1
2
3
4
5
6
7
horizon
8
9
10
11
12
13
14
15
0
5
horizon
MIDEAST
MA
OH
state wage
0.6
PA
state wage
state wage
0.84
WV
Impulse responses to debt shock
Imp u ls e r e s p o n s e s to d e b t s h o c k
Impulse responses to debt shock
Impuls e res pons es to debt s hoc k
state wage
0.36
0.1
0.24
0.5
0.70
-0.0
0.12
0.4
0.56
-0.1
0.00
0.3
0.42
-0.12
-0.2
0.2
-0.24
0.28
0.1
-0.3
-0.36
0.14
0.0
-0.48
-0.4
0.00
-0.1
-0.60
-0.14
-0.2
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
1
2
3
4
5
regional wage
6
7
8
9
10
11
12
13
14
15
0
1
2
3
4
5
6
8
9
10
11
12
13
14
0
15
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
9
10
11
12
13
14
15
horiz on
r egional wage
r egional wage
r egional wage
0.6
7
horizon
horiz on
hor izon
1.5
-0.5
-0.72
0
15
0.2
0.2
0.1
0.5
-0.0
-0.0
1.0
0.4
-0.2
-0.1
0.3
-0.2
-0.4
0.5
-0.3
0.2
-0.6
-0.4
0.1
0.0
-0.5
-0.8
0.0
-0.6
-0.1
0
1
2
3
4
5
6
7
hor izon
8
9
10
11
12
13
14
15
-1.0
-0.7
0
-0.5
1
2
3
4
5
6
7
horiz on
8
9
10
11
12
13
14
15
0
1
2
3
4
5
6
7
horizon
8
9
10
11
12
13
14
15
0
1
2
3
4
5
6
7
horiz on
8
FARWEST
CA
NV
OR
WA
Impulse responses to debt shock
Impulse responses to debt shock
Impulse responses to debt shock
state wage
state wage
state wage
0.8
0.6
0.6
0.5
Impulse responses to debt shock
state wage
0.3
0.5
0.2
0.6
0.4
0.4
0.1
0.3
0.4
0.3
-0.0
0.2
0.2
0.2
0.1
-0.1
0.1
0.0
-0.2
0.0
0.0
-0.1
0
1
2
3
4
5
6
7
8
hor izon
9
10
11
12
13
14
0
15
5
10
0
15
5
regional wage
0.75
10
0
15
1
2
3
4
5
6
8
9
10
11
12
13
14
15
9
10
11
12
13
14
15
regional wage
0.08
regional wage
0.4
7
hor izon
horizon
horizon
regional wage
0.6
-0.3
-0.1
-0.2
-0.2
0.00
0.5
0.50
0.2
0.25
-0.0
0.00
-0.2
-0.25
-0.4
-0.08
0.4
-0.16
0.3
-0.24
-0.32
0.2
-0.40
0.1
-0.6
-0.50
-0.48
0.0
-0.56
-0.8
-0.75
-0.1
0
1
2
3
4
5
6
7
8
hor izon
9
10
11
12
13
14
15
0
5
10
horizon
15
0
0
5
10
horizon
15
1
2
3
4
5
6
7
hor izon
8
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)
To conclude….
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