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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This paper builds upon the empirical literature on the macroeconomic impact of real exchange rate depreciations for a sample of 27 emerging economies. We find that real exchange rate depreciations tend to increase a country's risk premium. This effect is neither linear nor symmetric: large real exchange depreciations are much more detrimental and real appreciations do not seem to reduce the risk premium. We also show that the main channels for the real exchange rate to affect country risk are external and domestic balance sheet effects, stemming from the sudden increase in the stock of external or domestic dollar denominated debt, respectively. This is particularly the case in the countries with the largest financial imperfections. Competitiveness is not an important enough factor to outweigh this negative effect. Finally, fixed exchange rate regimes tend to amplify balance sheet effects, beyond the extent of real depreciations. The data indicates that it could be due to a larger accumulation of external debt under fixed regimes.
This paper identifies the basic features of the price setting mechanism in the Spanish economy, using a large dataset that contains over 1.1 million price records and covers around 70% of the expenditure on the CPI basket. In particular, the paper identifies differences in the frequency and size of price adjustments across types of products and explores how these general features are affected by certain specific factors: seasonality, the level of inflation, changes in indirect taxation and the practice of using psychological and round prices. We find that prices do not change often but do so by a large amount, although there is a marked heterogeneity across products. Moreover, the high frequency of price reductions suggests that there is no strong downward rigidity. Our evidence also supports the use of time and state dependent pricing strategies.
Published in: Economic Modelling (2006)
This paper aims at analysing the impact of household borrowing on consumption. These variables are modelled jointly in a Vector Error Correction Model (VECM) where labour income, wealth variables and nominal interest rates are also included. The main estimation result is that deviations of borrowing from its long-run trend have a significant impact on consumption: when lending is above (below) its long-run level, future consumption contracts (expands). This evidence is also, found in a simpler model in which consumption is not modelled explicitly. In addition, when consumption departs from its long-run level, it seems to be an indicator of changes in future labour income.
This paper investigates the factors that determine the use of collateral in time series and cross-section data on the population of banks' loans to Spanish firms every year from 1984 to 2002 (over two million loans). Using the record of actual loan defaults of borrowers as a measure of credit quality, we find that the use of collateral is higher in loans to low credit quality borrowers. The likelihood of collateral is also higher when the lender is a small bank, when the lender is a savings bank and in loans made in periods of low economic growth. On the other hand, the use of collateral is less likely in loans made to borrowers with longer relationship with the lender and in more concentrated credit markets. A higher risk free interest rate of the economy and a smaller size of the loan increase the likelihood that a loan will be totally secured with collateral instead of partially secured. Overall the result are consistent with theories that explain the use of collateral as a consequence of information asymmetries in credit markets, although the effect of macroeconomic conditions in the use of collateral remains unexplained.
Published in: Journal of Financial Economics (2006)
This paper investigates the identification and dating of the European business cycle, using different methods. We concentrate on methods and statistical series that provides timely and accurate information about the contemporaneous state of the economy in order to provide the reader with a useful tool that allows him or her to analyze current business conditions and make predictions about the future state of the economy. In this spirit, we find that the European Commission industrial confidence indicator (ICI) is useful in providing that information.
This paper reviews the existing empirical evidence on the short term impact on prices of fiscal variables and assesses it against new results from harmonised simulations, conducted with six well established econometric models used by the ECB and five national central banks (NCBs) of the Eurosystem. The outcome is also compared with results from the European Commission and the OECD models. Overall, a broad consensus appears on the impact on prices of changes in individual government budget items in the euro area. In all cases, changes in government demand and in direct taxes paid by households have a limited impact on prices in the first year while, in contrast, changes in indirect taxes and employers' social security contributions have a relatively large impact. The second year results show that the effects on prices usually take some time to materialise fully; in particular, they often become large for the public consumption shock.
Filters used to estimate unobserved components in time series are often designed on a priori grounds, so as to capture the frequencies associated with the component. A limitation of these filters is that they may yield spurious results. The danger can be avoided if the so called ARIMA model based (AMB) procedure is used to derive the filter. However, parsimony of ARIMA models typically implies little resolution in terms of the detection of hidden components. It would be desirable to combine a higher resolution with consistency with the structure of the observed series. We show first that for a large class of a priori designed filters, an AMB interpretation is always possible. Using this result, proper convolution of AMB filters can produce richer decompositions of the series that incorporate a priori desired features for the components, and fully respect the ARIMA model for the observed series. (Hence no additional parameter needs to be estimated.) The procedure is discussed in detail in the context of business cycle estimation by means of the Hodrick Prescott filter applied to a seasonally adjusted series or a trend cycle component.
Published in: International Journal of Forecasting (2005)
The aim of this paper is to isolate the long run movements on equilibrium interest rate (or natural rate of interest) and potential growth. This estimations has been compute for US and Germany using a methodology developed by Laubach and Williams that is based on a Kalman Filter estimation of this two unobserved variables in a reduce structural model. The results match properly with the generally accepted periods of recessions and points to a reduced variation of the natural rate of interest, the potential growth and the business cycle during the last decade. This lower variation question the effects on the policy design from recent events like the "new economy". Moreover, we find that recently the natural rate of interest had rose in US and exhibits a moderate deceleration on Germany, that seems compatible with the different effect of new technologies for both economies. Moreover, the paper reached some aspects of the current monetary policy stance in both countries.
The Spanish original of this publication has the same number.
In this paper a New Keynesian model is described and partially estimated for the euro area. The model is then used to analyze the stabilizing properties of alternative monetary policy rules for the euro area: instrument (Taylor-type) rules and targeting rules. Our main finding is that if instrument rules are designed optimally they behave similarly to targeting rules both in terms of performance and robustness. This result is obtained for a variety of ECB preferences on stabilizing inflation, the output gap, and the nominal interest rate. Furthermore, the rule quasi-equivalence is also obtained if the ECB objective function is based on welfare maximization.
This paper analyses the determinants of the probability of default (PD) of bank loans. We focus the discussion on the role of a limited set of variables (collateral, type of lender and bank borrower relationship) while controlling for the other explanatory variables. The study uses information on the more than three million loans entered into by Spanish credit institutions over a complete business cycle (1988 to 2000) collected by the Bank of Spain's Credit Register (Central de Información de Riesgos). We find that collateralised loans have a higher PD, loans granted by savings banks are riskier and, finally, that a close bank borrower relationship increases the willingness to take more risk.
Published in: Journal of Banking Finance (2004)
This paper presents a new version of the Spanish quarterly macroeconometric model. The previous version [see Willman and Estrada (2002)] evidenced a number of shortcomings, some of which are redressed here. In particular, the model now uses seasonally and working days adjusted time series; it considers a breakdown by sector (government and private sectors), by external trade (euro area and rest of the world) and by investment (residential and productive); and finally, it includes wealth evaluated at market prices. While the long run properties of the old model have not changed substantially, in the short run different simulation exercises show that the new model provides stronger responses in the first two years and a prompter and faster return to the baseline values.
To date, Internet banks worldwide have underperformed newly chartered traditional banks mainly because their higher overhead costs. This paper analyses whether this is a temporary phenomenon and whether Internet banks may generate scale economies in excess of those available to traditional banks and/or they (and their customers) may accumulate experience with this new business model, which may allow them to perform as well or even better than their peers, the traditional banks. To this end, we have followed the same analytical framework and methodology used by DeYoung (2001, 2002, forthcoming) for Internet banks in the United States although the limitations in the availability of data as well as the existence of different regulatory frameworks and market conditions, particularly in the retail segment, in the fifteen European Union countries have required some modifications to such methodology. The empirical analysis confirms that Internet banks show technologically based scale economies, while no conclusive evidence exists of technology based learning economies. As Internet banks get larger, the profitability gap with traditional banks shrinks. To the extent that Internet banks are struggling to prove themselves a viable business model, European authorities may encourage a larger number of consumers to use this delivery channel, by tackling consumers´ security concerns. This would allow Internet banks to capture more of the potential scale efficiencies implied in our estimations.
Published in: European Financial Management (2007)
In this paper, we construct a firm-level estimate of the probability of default for a large sample of Spanish firms that can be interpreted as a composite measure of individual corporate financial pressure. By combining firms' accounting data from the Central Balance Sheet Data Office of the Banco de España with credit data from the Spanish Central Credit Register, we obtain a large data set (80,701 observations) covering a significantly longer time period (1985-2001) than is usual in the literature. Our results point to the importance of income leverage (together with other relatively standard financial ratios) for the financial pressure on firms, but also to the relevance of non-linearities and the inability of purely firm-level variables to capture completely the temporal behaviour of aggregate firm default rates. Thus, the real GDP growth rate and an average interest cost of debt are significant additional predictors of a firm's probability of default.
En este trabajo se pretende comprobar la posible existencia de histéresis en la oferta de exportaciones de manufacturas en algunos países de la zona del euro, es decir, se analiza si los movimientos transitorios del tipo de cambio tienen un impacto permanente sobre las exportaciones. La presencia de costes irrecuperables en la entrada y salida del mercado a los que se enfrentan los productores puede justificar la existencia de histéresis en el comercio, ya que las empresas exportadoras tomarían en consideración el tipo de cambio futuro como una variable adicional a la hora de decidir si se entra o no en el mercado, afectando de esta forma al volumen de exportación agregado. Así, el trabajo presenta una estimación de un modelo de oferta y demanda de exportaciones de manufacturas para la mayoría de los países de la zona euro donde la oferta toma en cuenta la evolución futura del tipo de cambio a partir de la estimación secuencial de sus dos primeros momentos. De acuerdo con los resultados obtenidos, el tipo de cambio esperado no es, en la mayor parte de los casos, una variable explicativa de la evolución de la oferta de exportaciones. De este modo, en contra de la evidencia disponible con datos de empresas, el análisis macroeconómico efectuado no detecta efectos de histéresis significativos en la oferta de exportaciones.
In this paper, we present a dynamic optimizing model that allows explicitly for imperfect substitutability between di erent financial assets. This is specified in a manner which captures Tobin's (1969) view that an expansion of one asset's supply a ects both the yield on that asset and the spread or "risk premium" between returns on that asset and alternative assets. Our estimates of this model on U.S. data confirm that some of the observed deviations of long-term rates from the expectations theory of the term structure can be traced to movements in the relative stocks of financial assets. The richer aggregate demand and asset specifications imply that there exists an additional channel of monetary policy. Our results suggest that central bank operations exercise a modest influence on the relative prices of alternative financial securities, and so exert an extra e ect on long-term yields and aggregate demand separate from their e ect on the expected path of short-term rates.
Published in: Journal of Money, Credit and Banking (2004)
We propose a comprehensive methodology to characterize the business cycle comovements across European economies and some industrialized countries, always trying to leave the data speak. Out of this framework, we propose a novel method to show that there is no an Euro economy that acts as an attractor to the other economies of the area. We show that the relative comovements across EU economies are prior to the establishment of the Monetary Union. We are able to explain an important proportion of the distances across their business cycles using macrovariables related to the structure of the economy, to the directions of trade, and to the size of the public sector. Finally, we show that the distances across countries that belong to the European Union are smaller than the distances across newcomers.
Published in: Journal of Economic Dynamics and Control (2006)
The purpose of this paper is to study the determinants of equilibrium in the market for daily funds. We use the EONIA panel database which includes daily information on the lending rates applied by contributing commercial banks. The data clearly shows an increase in both the time series volatility and the cross section dispersion of rates towards the end of the reserve maintenance period. These increases are highly correlated. With respect to quantities, we find that the volume of trade as well as the use of the standing facilities are also larger at the end of the maintenance period. Our theoretical model shows how the operational framework of monetary policy causes a reduction in the elasticity of the supply of funds by banks throughout the reserve maintenance period. This reduction in the elasticity together with market segmentation and heterogeneity are able to generate distributions for the interest rates and quantities traded with the same properties as in the data.
Published in: European Economic Review (2008)
Cuando se efectúa el análisis de los factores explicativos de la evolución de las exportaciones, a menudo se consideran únicamente como variables determinantes aquellas que afectan a la demanda de exportaciones, en particular, la competitividad y la demanda exterior, suponiendo así, que la elasticidad de la oferta es infinita. Sin embargo, esa forma de proceder presenta ciertas limitaciones, pues supone renunciar a priori a utilizar la información referida al comportamiento de los oferentes, sin contrastar su posible relevancia en la evolución de las ventas al exterior. El objetivo del presente artículo es profundizar en el análisis de las exportaciones, permitiendo que las ventas al exterior puedan influir sobre los precios de exportación. Para ello, se estima un modelo biecuacional oferta demanda y multivariante en el que los precios y cantidades se determinan conjuntamente para ocho países de la UEM con datos trimestrales de exportaciones de manufacturas desde comienzos de los años ochenta. La robustez de las estimaciones de demanda a diferentes especificaciones y la nula significatividad de la pendiente de la oferta en la mayoría de los países, validaría el supuesto de una oferta infinitamente elástica normalmente asumido. De esta forma, perturbaciones en la competitividad, en la renta de los consumidores o en los costes tienen un mayor efecto sobre las cantidades que sobre los precios.
Between 1990 and 2001 the Argentine peso appreciated by 80 percent in real terms, and its overvaluation has been singled out as one of the main suspects in the debate on the causes of the Argentina collapse of late 2001. This paper assesses the degree of real misalignment in Argentina over the Convertibility period using a model in which the equilibrium real exchange rate is defined as the value consistent with (i) a balance of payments position where any current account imbalance is financed by a sustainable flow of international capital (external equilibrium), and (ii) traded / nontraded sector productivity differentials (internal equilibrium). Empirical implementation of the model suggests that the initial real appreciation of the peso, between 1990 and 1993, was consistent with the productivity increases that Argentina enjoyed following the stabilization of the economy after the hyperinflation of the late 1980s. But after 1996 a widening gap opened between the observed real exchange rate and that consistent with a sustainable net foreign asset position. Our estimates indicate that in 2001 the peso was overvalued by over 50 percent. The model allows us to assess how much of the overvaluation resulted from Argentina's inadequate choice of anchor currency and how much from a divergence of fundamentals between the US and Argentina, ultimately due to the maintenance of policies inconsistent with the peg. We find that both factors played a r ole in the overvaluation accumulated between 1977 and 2001 that preceded the collapse of the Convertibility regime.
This paper examines the properties of G-7 cycles using a multicountry Bayesian panel VAR model with time variations, unit specific dynamics and cross country interdependences. We demonstrate the presence of a significant world cycle and show that country specific indicators play a much smaller role. We detect di erences across business cycle phases but, apart from an increase in synchronicity in the late 1990s, find little evidence of major structural changes. We also find no evidence of the existence of an Euro area specific cycle or of its emergence in the 1990s.
Published in: Journal of Monetary Economics (2007)
This paper studies the existence and the scale of education externalities in the unemployment durations su ered by workers in the UK. First, we develop a theoretical model. Using a matching framework we show that a rise in the average level of education of a labour market will a ect unemployment durations in two di erent ways. It will increase the firms' expected profits per vacancy opened, since firms expect to be matched with a more qualified worker, rising job creation and reducing unemployment durations. We call this the Composition or External e ect. But, since more qualified workers are more e cient in the process of job search, it will also rise the competition amongst workers for opened vacancies, increasing unemployment durations. We name this the Competition e ect. In the most skilled segments of the labour market the composition e ect will dominate the competition e ect, while in the least skilled segments the opposite will be true. Then, we test these theoretical results empirically using data from the UK Labour Force Survey for the 17 UK regions over the period 1992Q1-99Q4. We find that a 1% rise in the average level of education reduces unemployment durations of individuals from skilled occupations by 2.9% on average, while it rises the unemployment durations of individuals from unskilled occupations by 1.9% on average. This e ect is robust to di erent measures of education, to controlling for unobserved heterogeneity and to di erent parameterisations of the hazard function.
Fixing the exchange rate stabilises inflation and reduces monetary seignoriage, a key source of financing under the fiscal dominance hypothesis. However, the link between fixed exchange rate regimes and fiscal discipline in emerging markets has been found to be weak. This paper thoroughly reviews the issue through three venues. First, an alternative measure to gauge fiscal discipline –the so called shadow balance, inclusive of seignoriage revenues– is proposed, since the traditional one, the primary balance, does not convey monetary financing; notwithstanding this modification, no robust relation is found either. Second, we sustain and then prove the hypothesis that fixing the exchange rate may have offsetting effects on fiscal discipline through the relaxation of the fiscal constraint of the government. In particular fixing the exchange rate is expected to reduce the cost and burden of debt and to enhance the ability to obtain revenues through a higher level of activity. The empirical test of this hypothesis follows a two stage approach. First, we test the impact of the fiscal constraints on discipline: as advocated, a higher fiscal burden induces higher discipline; higher activity does not clearly relax discipline, although expenditures grow and the burden of debt is shown to diminish. The second stage tests the impact of fixed regime on the considered determinants. Again, the relation between fixed regimes and the reduction of the burden is robust, but not so the impact of fixed regimes on the cycl e. Third, we explore the dynamics related to the pegging of the exchange rate, uncovering that at its inception exchange rates trigger an expansion and reduce the debt burden. This final outcome does not only strengthen our hypothesis but illustrates how the peg sows the seeds of its own destruction, also at the fiscal level.
This paper analyses the behaviour of credit default swaps (CDS) for a sample of firms and finds support for the theoretical equivalence of CDS prices and credit spreads. When this is violated, the CDS price can be viewed as an upper bound on the price of credit risk, while the spread provides a lower bound. The paper shows that the CDS market is the main forum for credit risk price discovery and that CDS prices are better integrated with firm-specific variables in the short run. Both markets equally reflect these factors in the long run, and this is primarily brought about by bond market adjustment.
Published in: The Journal of Finance (2005)