The objective of the Working Papers series is to disseminate original research studies on economics and finance, which since 2003 have been reviewed on an anonymous basis. Through their publication, the Banco de España hopes to contribute to the economic analysis and knowledge of the Spanish economy and its international context.
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For reasons of empirical tractability, analysis of cointegrated economic time series is often developed in a partial setting, in which a subset of variables is explictly modeled conditional on the rest. This approach yields valid inference only if the conditioning variables are weakly exogenous for the parameters of interest. This paper proposes a new test of weak exogeneity in panel cointegration models. The test has a limiting Gumbel distribution that is obtained by first letting T → ∞ and then letting N → ∞. We evaluate the accuracy of the asymptotic approximation in finite samples via simulation experiments. Finally, as an empirical illustration, we test weak exogeneity of disposable income and wealth in aggregate consumption.
Do laws to protect borrowers curb foreclosures? This question is addressed by analysing the impact of foreclosure laws on default rates at state level in the US mortgage market. Using panel data techniques, we find a statistically significant effect of regulation on the different stages of the foreclosure process. More precisely, we analyse the effect of regulation on 60- day delinquencies and foreclosure starts, with a focus on three protective elements commonly found in state foreclosure laws, namely requiring a judicial process, granting a redemption period and banning a deficiency judgment. We find that, whereas protective states exhibit, on average, lower 60-day delinquency rates, more protection does not ultimately bring about lower foreclosure rates. Lenders seem to ration credit to mitigate costly protective laws, thereby reducing delinquency rates; but this effect is overshadowed by a moral hazard problem since, once borrowers are delinquent, they have incentives to take advantage of the protection due to the lower costs of foreclosure. We also find that the recent housing market crisis has exacerbated that behaviour. Finally, we show that lengthening the foreclosure process is no cure for the foreclosure crisis.
This article estimates a general credit risk model with both macroeconomic and latent credit factors for Spanish banks during the period 2004-2010. The proposed framework allows to estimate with bank level data both the standard credit risk model of Basel II and generalized models. I find evidence of persistence in the credit latent factor and of a significant effect of GDP growth and interbank rates on loan default rates. The estimated default correlation is low across specifications. The model is also used to calculate the impact on the probabilities of default of stressed economic scenarios.
We analyze the dynamic interactions between commodity prices and output growth of the seven biggest Latin American exporters: Argentina, Brazil, Colombia, Chile, Mexico, Peru and Venezuela. Using a novel definition of Markovswitching impulse response functions, we find that the response of their respective output growth to commodity price shocks is time-dependent, size-dependent and sign-dependent. Overall, the major evidence of asymmetries in output growth responses occurs when commodity price shocks lead to regime shifts. Accordingly, we consider that the design of optimal counter-cyclical stabilization policies in this region should take into account that the reactions of economic activity vary considerably across business cycle regimes.
The literature has found that the size of firms matters for innovation and productivity and, thus, for economic performance. It is therefore worth explaining why enterprises in Spain are small in international terms. Our findings indicate that the quality of the institutional environment plays a role. Specifically, this paper analyses the different channels through which the efficacy of Spanish courts may affect the size of the companies at the provincial level. Regarding the existing literature, this paper is innovative in several important respects. First, we disentangle the impact of judicial efficacy on average firm size by differentiating between the effect on the growth of incumbent firms (intensive margin) and the effect on entry and exit rates (extensive margin), finding clear evidence of the former but not of the latter. We do so by using a firm-level database of more than half a million companies and real data (not estimates) on judicial efficacy at the local level. Second, this paper is the first to analyse the relationship between firm size and the effectiveness of justice after the reform of the civil procedures in 2000. Finally, and most significantly, it is the first paper in the literature to analyse the specific impact of the various civil procedures, both at the declaratory and the executory stage. In general, we find that judicial efficacy has a positive effect on firm size, but it critically depends on the type of the procedure, something that the previous literature has overlooked. More specifically, judicial efficacy matters at the declaratory stage (e.g. when a debt is declared and recognised by a judge), while it does not have a significant impact on size at the executory stage.
The paper warns about the potential efficiency losses associated with low business bankruptcy rates (number of firms filing for bankruptcy as a proportion of the total stock of firms) and shows that welfare could be improved by increasing the protection of creditors in the bankruptcy system. These ideas are illustrated with the Spanish case. The paper also predicts a positive correlation between welfare and bankruptcy rates, a finding that seems consistent with the empirical evidence. The argument, analysed with an incomplete contracts model à la Bolton and Scharfstein (1996), is as follows. The low efficiency and low creditor protection of the Spanish bankruptcy system relative to those of an alternative insolvency institution, namely the mortgage system, mean that firms and their creditors mainly deal with credit provision and eventual insolvency through the latter. However, in order to use the mortgage system, some firms must overinvest in capital assets (real estate, equipment) since those are the assets that can be pledged as mortgage collateral. This overinvestment leads to productive inefficiencies, which may be very costly for industries that require a high level of other factors of production (e.g. R&D). Furthermore, the mortgage system is too creditor friendly, in the sense that it always grants the control of the firm’s assets to creditors in the event of default. Since creditors are inherently biased towards
liquidation, this leads to some inefficient liquidations.
We propose a near-rational model of retail price adjustment consistent with microeconomic and macroeconomic evidence on price dynamics. Our framework is based on the idea that avoiding errors in decision making is costly. Given our assumed cost function for error avoidance, the timing of firms’ price adjustments is determined by a weighted binary logit, and the prices they choose are determined by a multinomial logit. We build this behavior into a DSGE model, estimate the decision cost function by matching microdata, and simulate aggregate dynamics using a tractable algorithm for heterogeneous-agent models. Both errors in the prices firms set, and errors in the timing of these adjustments, are relevant for our results. Errors of the first type help make our model consistent with some puzzling observations from microdata, such as the coexistence of large and small price changes, the behavior of adjustment hazards, and the relative variability of prices and costs. Errors of the second type increase the real effects of monetary shocks, by reducing the correlation between the value of price adjustment and the probability of adjustment, (i.e., by reducing the «selection effect»). Allowing for both types of errors also helps reproduce the effects of trend infl ation on price adjustment behavior. Our model of error-prone pricing in many ways resembles a stochastic menu cost (SMC) model, but it has less free parameters than most SMC models have, and unlike those models, it does not require the implausible assumption of i.i.d. adjustment costs. Our derivation of a weighted logit from control costs oers an alternative justication for the adjustment hazard derived by Woodford (2008). Our assumption that costs are related to entropy is similar to the framework of Sims (2003) and the subsequent \rational inattention» literature. However, our setup has the major technical advantage that a firm’s idiosyncratic state variable is simply its price level and productivity, whereas under rational inattention a firm’s idiosyncratic state is its prior (which is generally an infinite-dimensional object).