Working Papers

The aim of the Working Papers series is to disseminate research papers on economics and finances by Banco de España researchers. The Working Papers are published once they have successfully come through an anonymous evaluation process. Through their publication, the Banco de España seeks to contribute to the economic analysis and knowledge of the Spanish economy and its international context.

The opinions and analyses published in the Working Papers series are the responsibility of the authors and are not necessarily shared by the Banco de España or the Eurosystem.

All documents published in this collection are available in electronic format. If they are not directly available through this website, copies can be requested from the Publications Unit.

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  • 2111
    Time variation in lifecycle consumption and income (2 MB) Yunus Aksoy, Henrique S. Basso and Carolyn St Aubyn

    We document systematic and signicant time variation in US lifecycle nondurable
    consumption profiles. Consumption profiles have consistently become flatter:
    intergenerational differences in consumption across age groups have decreased over
    time. Pooling data across different periods to identify lifecycle profiles and failing to
    account for unobserved heterogeneity masks relevant time variations and may articially
    generate hump-shaped consumption age profiles. The main driver behind lifecycle
    consumption variations are lifecycle income changes, which display similar flattening.
    Employing a lifecycle model we show changes in income are sufficient to match the
    movements in consumption.

  • 2108
    Endogenous time variation in vector autoregressions (1 MB) Danilo Leiva-Leon and Luis Uzeda

    We introduce a new class of time-varying parameter vector autoregressions (TVP-VARs) where the identified structural innovations are allowed to influence the dynamics of the coefficients in these models. An estimation algorithm and a parametrization conducive to model comparison are also provided. We apply our framework to the US economy. Scenario analysis suggests that, once accounting for the influence of structural shocks on the autoregressive coefficients, the effects of monetary policy on economic activity are larger and more persistent than in an otherwise standard TVP-VAR. Our results also indicate that cost-push shocks play a prominent role in understanding historical changes in inflation-gap persistence.

  • 2107
    New dimensions of regulatory complexity and their economic cost. An analysis using text mining (1 MB) Juan de Lucio and Juan S. Mora-Sanguinetti

    Complex or poorly drafted regulations are more difficult for economic agents to implement, eroding economic efficiency. The literature has so far concentrated on the analysis of regulatory complexity as a phenomenon related to the “quantity” of norms. Regulation can also be complex because of “qualitative” reasons such as its linguistic ambiguity or its relational structure (references between legal documents). This article innovates by analyzing these new dimensions of complexity: we develop new indicators for legibility and regulatory interconnectedness. To do so, we constructed a new database (RECOS - Regulatory Complexity in Spain) extracting information from 8,171 norms (61 million words) covering the regulation set of all the Spanish autonomous regions. We analyze the relationship between these new indicators and productivity (as a relevant economic variable) and judicial efficacy (as a relevant institutional-structural variable). While each of these areas should be analyzed in separate articles, this research shows that the new dimensions of regulation complexity matter and also have significant results.

  • 2106
    Market polarization and the Phillips curve (2 MB) Javier Andrés, Óscar Arce and Pablo Burriel

    The Phillips curve has flattened out over the last decades. We develop a model that rationalizes this phenomenon as a result of the observed increase in polarization in many industries, a process along which a few top firms gain an increasing share of their industry market. In the model, firms compete à la Bertrand and there is exit and endogenous market entry, as well as optimal up and downgrading of technology. Firms with larger market shares find optimal to dampen the response of their price changes, thus cushioning the shocks to their marginal costs through endogenous countercyclical markups. Thus, regardless of its causes (technology, competition, barriers to entry, etc.), the recent increase in polarization in many industries emerges in the model as the key factor in explaining the muted responses of inflation to movements in the output gap witnessed recently.

  • 2105
    Understanding the performance of machine learning models to predict credit default: a novel approach for supervisory evaluation (1 MB) Andrés Alonso and José Manuel Carbó

    In this paper we study the performance of several machine learning (ML) models for credit default prediction. We do so by using a unique and anonymized database from a major Spanish bank. We compare the statistical performance of a simple and traditionally used model like the Logistic Regression (Logit), with more advanced ones like Lasso penalized logistic regression, Classification And Regression Tree (CART), Random Forest, XGBoost and Deep Neural Networks. Following the process deployed for the supervisory validation of Internal Rating-Based (IRB) systems, we examine the benefits of using ML in terms of predictive power, both in classification and calibration. Running a simulation exercise for different sample sizes and number of features we are able to isolate the information advantage associated to the access to big amounts of data, and measure the ML model advantage. Despite the fact that ML models outperforms Logit both in classification and in calibration, more complex ML algorithms do not necessarily predict better. We then translate this statistical performance into economic impact. We do so by estimating the savings in regulatory capital when using ML models instead of a simpler model like Lasso to compute the risk-weighted assets. Our benchmark results show that implementing XGBoost could yield savings from 12.4% to 17% in terms of regulatory capital requirements under the IRB approach. This leads us to conclude that the potential benefits in economic terms for the institutions would be significant and this justify further research to better understand all the risks embedded in ML models.

  • 2104
    Are we moving towards an energy-efficient low-carbon economy? An input-output LMDI decomposition of CO2 emissions for Spain and the EU28 (1 MB) Darío Serrano-Puente

    Spain is on a path towards the decarbonization of the economy. This is mainly due to structural changes in the economy, where less energy-intensive sectors are gaining more relevance, and due to a higher use of less carbon-intensive primary energy products. This decarbonization trend is in fact more accentuated than that observed in the EU28, but there is still much to be done in order to reverse the huge increases in emissions that occurred in Spain prior to the 2007 crisis. The technical energy efficiency is improving in the Spanish economy at a higher rate than in the EU28, although all these gains are offset by the losses that the country suffers due to the inefficient use of the energy equipment. There is an installed energy infrastructure (in the energy-consumer side) in the Spanish economy that is not working at its maximum rated capacity, but which has very high fixed energy costs that reduce the observed energy efficiency and puts at risk the achievement of the emissions and energy consumption targets set by the European institutions. We arrive to these findings by developing a hybrid decomposition approach called «input-output logarithmic mean Divisia index» (IO-LMDI) decomposition method. With this methodological approach, we can provide an allocation diagram scheme for assigning the responsibility of primary energy requirements and carbon-dioxide emissions to the end-use sectors, including both economic and non-productive sectors. In addition, we analyze more potential influencing factors than those typically examined, we proceed in a way that reconciles energy intensity and energy efficiency metrics, and we are able to distinguish between technical and observed end-use energy efficiency taking into account potential rebound effects and other factors.

  • 2103
    EMU deepening and sovereign debt spreads: using political space to achieve policy space (1 MB) Iván Kataryniuk, Víctor Mora-Bajén and Javier J. Pérez

    Sovereign spreads within the European Monetary Union (EMU) arise because markets price-in heterogeneous country fundamentals, but also re-denomination risks, given the incomplete nature of EMU. This creates a permanent risk of financial fragmentation within the area. In this paper we claim that political decisions that signal commitment to safeguarding the adequate functioning of the euro area influence investors’ valuations. We focus on decisions conducive to enhancing the institutional framework of the euro area (“EMU deepening”). To test our hypothesis we build a comprehensive narrative of events (decisions) from all documents and press releases issued by the Council of the EU and the European Council during the period January 2010 to March 2020. We categorize the events as dealing with: (i) economic and financial integration; (ii) fiscal policy; (iii) bailouts. With our extremely rich narrative at hand, we conduct event-study regressions with daily data to assess the impact of events on sovereign bond yields and find that indeed decisions on financial integration drive down periphery spreads. Moreover, while decisions on key subjects present a robust effect, this is not the case with prior discussions on those subjects at the Council level. Finally, we show that the impacts arise from reductions in peripheral sovereign spreads, and not by the opposite movement in core countries. We conclude that EU policy-makers have at their disposal signicant “political space” to reduce fragmentation and gain “policy space”.

  • 2102
    Economic uncertainty and divisive politics: evidence from the dos Españas (5 MB) Sandra García-Uribe, Hannes Mueller and Carlos Sanz

    This article exploits two newspaper archives to track economic policy uncertainty in Spain in 1905-1945, a period of extreme political polarization. We find that the outbreak of the civil war in 1936 was anticipated by a striking upward level shift of uncertainty in both newspapers. We study the dynamics behind this shift and provide evidence of a strong empirical link between increasing uncertainty and the rise of divisive political issues at the time: socio-economic conflict, regional separatism, power of the military, and role of the church. This holds even when we exploit variation in content at the newspaper level.

  • 2101
    Optimal progressivity of personal income tax: a general equilibrium evaluation for Spain (579 KB) Darío Serrano-Puente

    Is the Spanish economy positioned at its optimal progressivity level in personal income tax? This article quantifies the aggregate, distributional, and welfare consequences of moving towards such an optimal level. A heterogeneous households general equilibrium model featuring both life cycle and dynastic elements is calibrated to replicate some characteristics of the Spanish economy and used to evaluate potential reforms of the tax system. The findings suggest that increasing progressivity would be optimal, even though it would involve an efficiency loss. The optimal reform of the tax schedule would reduce wealth and income inequality at the cost of negative effects on capital, labor, and output. Finally, these theoretical results are evaluated using tax micro data and describe a current scenario where the income-top households typically face suboptimal effective average tax rates.

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