Discussion of Fiscal policy in open economies: estimates for the Euro Area By Lorenzo Forni and Massimiliano Pisani Michel Strawczynski Thursday, October 29th

General Equilibrium. Features of the Model General Equilibrium. Open Economy. Both Ricardian and Liquidity-Constrained Consumers. Monetary Policy by Taylor Rule. Government budget composition: direct and indirect taxes; government consumption, investment and transfers.

Comparison to a Recent Contribution “ Fiscal stimulus with spending reversals”, Corsetti, Meier and Mueller (2009) : That paper is richer than this one on the dynamics of future fiscal policy adjustment. This paper is richer on the detailed instruments (different government expenses and taxes).

General Equilibrium. Contributions Overall Fiscal policy multipliers. Fiscal multipliers (4 months): government consumption – and not public expenditure (table 4) - (0.73), transfers (0.18), capital taxes (0.03), wage taxes (0.67), consumption taxes (0.71). Impact on BOP and real exchange rate.

Two Comments I. The result on transfers must be checked in light of the possibility on concentrating transfers on liquidity constrained individuals. The effect on output “on impact” (0.25) is much lower than government consumption (1) and labor (0.5) and consumption (0.6) taxes. II. Given the richness of instruments, it is important to test government investment.

Comment I –I find the result on transfers quite puzzling: the multiplier is a quarter of the one for taxes. –This result derives from a relatively low increase in consumption on impact by Non- Ricardian consumers (0.5), and an extremely sensitive offset by Ricardian consumers. –I will now argue that on impact the effect is higher. –Concerning taxes, the Ricardian offset is low, because of intertemporal substitution.

Transfers Usually concentrated on Non-Ricardian consumers, as assumed here. The MPC, specially in crisis periods, is close to 1. Thus, the impact might be at least equal compared to government consumption. The inexistence of cycle-contingent provisions (f.e. freeing employee funds) makes a clear case for liquidity constraints.

Private consumption in the Euro 16 Area (source: ECB)

Total Reduction in Consumption Reduction in: Consumption GDP In Current Prices % 25, , Percentage of liquidity constraints consumers under the assumption of MPC of 1: 0.51 (Right test would be; excl. durables) 25 25

If we assume that Ricardians reduce durables consumption (one quarter of consumption): 0.65*0.25= *1= = This is consistent with an MPC of 1 for Non- Ricardians.

Results from other Papers: Spilimbergo, Symansky and Schindler (2009), “Fiscal Multipliers” IMF Staff Position Note 09/11 ResearchTransfers1YIndirect Tax AlEyd-Barell0.5(Germany)0.5 FLK (IMF)0.5 (Euro Area) Zandi (2008)1.6 (U.S.A.) 1

Comment II Given the richness in instruments of this paper, it is important to add tests for government investment: Ex-Im=Y(I( - C+G+I G +I P This is the single instrument that enhances Y directly, and is expected to have a balancing force on B of P deterioration.