1. 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, 25-26 February 2010

2. 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

3. 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)

4. 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

5. 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)

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

7. 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

8. 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

9. 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

10. 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?

11. 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

12. 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)