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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  • 2026
    Spanish regions in global value chains: how important? how different? (1 MB) Elvira Prades-Illanes and Patrocinio Tello-Casas

    The recent release of EUREGIO, a novel global input-output database with regional
    detail for EU countries, allows to analyze the participation of EU regions in Global Value
    Chains and their implications for the propagation of sector-specific shocks. We focus on
    Spanish regions to exploit the granular information embedded in this database. We first
    characterize foreign and domestic trade inter-linkages of Spanish regions and sectors.
    Using an extended version of the Leontief scheme, we compute upstream output and
    value added multipliers. Then, we calculate indicators developed in the Global Value
    Chain literature to breakdown each region trade flows, both exports and outflows,
    into value added components. Finally, by means of examples, we analyze the role of
    networks (domestic or foreign) in the propagation of demand shocks (from customers
    to suppliers), to evaluate the heterogeneous impact across regions and to illustrate
    the potential of this approach. Our findings indicate that Spanish regions participate
    differently in Global Value Chains and this fact may have important implications in the
    propagation of shocks. According with our results, the strongest user-supplier linkages
    are usually within the same sector, and, in general, with industries within the same
    region or other Spanish regions. The Basque Country is the region with sectors with
    the largest total output-multipliers and Catalonia with the lowest ones. Concerning
    their participation in Global Value Chains, the Basque Country is the most integrated
    region in the backward segment of the value chain, closely followed by Madrid, while
    Catalonia –and a lesser extent Canary Islands– shows a comparatively low participation.
    Concerning the forward participation, Catalonia shows the largest one on exports, while
    Madrid and the Basque Country in outflows.

  • 2025
    The decline in public investment: "social dominance" or too-rigid fiscal rules? (707 KB) Mar Delgado-Téllez, Esther Gordo, Iván Kataryniuk and Javier J. Pérez

    Public investment in advanced economies is at historical lows, and shows a declining
    trend since at least the 1980s. Two main hypotheses have been posed to rationalize this
    fact. On the one hand, the “social dominance hypothesis” claims that this is related to
    structural factors, given the upward social expenditure trends related to ageing populations
    and social preferences, and the operation of the government budget constraint (limits
    to further increase significantly tax revenues and public debt, in a context of secular
    stagnation). On the other hand, another branch of the literature indicates that too-rigid
    fiscal rule frameworks cause fiscal retrenchment episodes to hinge heavily on public capital
    expenditure, which does not recover enough in the subsequent expansion, creating a sort
    of downward hysteresis behaviour in this budgetary item. In this paper we look jointly at
    both sets of duelling explanatory factors, and show that both are key to understanding
    public investment dynamics in advanced economies over the past decades.

  • 2024
    Economic policy uncertainty in Latin America: measurement using Spanish newspapers and economic spillovers (2 MB) Corinna Ghirelli, Javier J. Pérez and Alberto Urtasun

    We construct Economic Policy Uncertainty (EPU) indexes for a number of Latin American
    (LA) economies (Argentina, Brazil, Chile, Colombia, Mexico, Peru, Venezuela) and the
    region as a whole based on the Spanish press. Our measures are comparable across
    countries. We study the macroeconomic effects of LA EPU shocks on the analyzed
    American economies and the Spanish economy. To study the international spillover
    effects on the Spanish economy we carry out two exercises by means of vector
    autoregression models. First, we estimate responses to unexpected shocks in LA EPU
    of the quotations of Spanish companies which are highly exposed to Latin America.
    Second, we study the impact of LA EPU shocks on Spanish macroeconomic aggregates.
    Unexpected shocks in LA EPU dampen signicantly the commercial relationship between
    Spain and LA countries. Spanish firms decrease their exports and foreign direct
    investments towards LA countries that experience negative shocks in EPU.

  • 2023
    A highway across the Atlantic? Trade and welfare effects of the EU-Mercosur agreement (1 MB) Jacopo Timini and Francesca Viani

    In this paper we analyze the EU-Mercosur agreement and predict its effects on trade and
    welfare using a general equilibrium structural gravity model. First, we estimate the increase
    in trade flows generated by trade agreements that are similar to the EU-Mercosur one, in a
    partial equilibrium setting. In a second step, the estimated increase in trade is mapped into
    reductions in bilateral trade costs and imputed to EU-Mercosur country pairs to compute
    the general equilibrium effects of the agreement in terms of trade creation, trade diversion,
    and welfare effects. Our results indicate that the EU-Mercosur agreement is likely to have a
    positive impact on trade and welfare of both regional blocs, although with substantial
    heterogeneity both between and within the two areas.

  • 2022
    Can subsidized employment tackle long-term unemployment? Experimental evidence from North Macedonia (1 MB) Alex Armand, Pedro Carneiro, Federico Tagliati and Yiming Xia

    This paper examines the impact of an experiment in North Macedonia in which
    vulnerable unemployed individuals applying to a subsidized employment program were
    randomly selected to attend job interviews. Employers hiring a new employee from the
    target population receive a subsidy covering the wage cost of the worker for the first six
    months. Using administrative employment data, we find that attending the job interview
    led to an increase of 15 percentage points in the likelihood of being employed 3.5 years
    after the start of the intervention. We also find positive and statistically significant effects
    on individuals’ non-cognitive and work-related skills.

  • 2021
    The impact of alternative forms of bank consolidation on credit supply and financial stability (2 MB) Sergio Mayordomo, Nicola Pavanini and Emanuele Tarantino

    Between 2009 and 2011, the Spanish banking system underwent a restructuring process
    based on consolidation of savings banks. The program’s design allows us to study how
    alternative forms of consolidation affect credit supply and financial stability. Compared
    to bank business groups, we find that bank mergers’ market power produces a
    contraction in credit supply, higher interest rates, but also a reduction in non-performing
    loans. We then estimate a structural model of credit demand and supply. We show that
    short-run welfare gains from improved financial stability outweigh losses from reduced
    credit supply, while small long-run cost efficiencies generate large welfare increases.

  • 2020
    Loan types and the bank lending channel (1 MB) Victoria Ivashina, Luc Laeven and Enrique Moral-Benito

    Using credit-registry data for Spain and Peru, we document that four main types of
    commercial credit –asset-based loans, cash flow loans, trade finance and leasing–
    are easily identifiable and represent the bulk of corporate credit. We show that credit
    growth dynamics and bank lending channels vary across these loan types. Moreover,
    aggregate credit supply shocks previously identified in the literature appear to be driven
    by individual loan types. The effects of monetary policy and the effects of the financial
    crisis propagating through banks’ balance sheets are primarily driven by cash flow loans,
    whereas asset-based credit is mostly insensitive to these types of effects.

  • 2019
    Keeping track of global trade in real time (498 KB) Jaime Martínez-Martín and Elena Rusticelli

    This paper builds an innovative composite world trade cycle index (WTI) by means of
    a dynamic factor model to perform short-term forecasts of world trade growth of both
    goods and (usually neglected) services. The selection of trade indicator series is made
    using a multidimensional approach, including Bayesian model averaging techniques,
    dynamic correlations and Granger non-causality tests in a linear VAR framework. To
    overcome the real-time forecasting challenges, the dynamic factor model is extended
    to account for mixed frequencies, to deal with asynchronous data publication and to
    include hard and survey data along with leading indicators. Nonlinearities are addressed
    with a Markov switching model. In the empirical application, simulations analysis in
    pseudo real-time suggest that: i) the global trade index is a very useful tool for tracking
    and forecasting world trade in real time; ii) the model is able to infer global trade cycles
    very precisely and better than several competing alternatives; and iii) global trade finance
    conditions seem to lead the trade cycle, in line with the theoretical literature.

  • 2018
    Macro-financial interactions in a changing world (5 MB) Eddie Gerba and Danilo Leiva-Leon

    We measure the time-varying strength of macro-financial linkages within and across the
    US and euro area economies by employing a large set of information for each region. In
    doing so, we rely on factor models with drifting parameters where real and financial cycles
    are extracted, and shocks are identified via sign and exclusion restrictions. The main
    results show that the euro area is disproportionately more sensitive to shocks in the US
    macroeconomy and financial sector, resulting in an asymmetric cross-border spillover
    pattern between the two economies. Moreover, while macro-financial interactions have
    steadily increased in the euro area since the late 1980s, they have oscillated in the US,
    exhibiting very long cycles of macro-financial interdependence.

  • 2017
    Do trade agreements with labor provisions matter for emerging and developing economies' exports? (546 KB) Fernando López-Vicente, Jacopo Timini and Nicola Cortinovis

    What are the effects of trade agreements with labor provisions on trade? This question
    has increasingly gained traction due to the growing importance of trade agreements
    and the proliferation of specific clauses related to labor rights and conditions included
    in such agreements. So far, the literature has focused on analyzing these effects at an
    aggregate level, with mixed results. In this paper, we capture heterogeneous effects
    of trade agreements with labour provisions separating exports by the factor intensity of
    their production process (labor-intensive vs. non-labor-intensive). Embedding institutional
    comparative advantage within a gravity framework, we show that, overall, the effects of
    trade agreements with labor provisions are no different from those of the universe of trade
    agreements. However, by affecting their comparative advantage, we find that agreements
    including labor provisions tend to reduce labor-intensive exports from emerging and
    developing to advanced economies (“South-to-North” exports).

  • 2016
    Deciphering the macroeconomic effects of internal devaluations in a monetary union (783 KB) Javier Andrés, Óscar Arce, Jesús Fernández-Villaverde and Samuel Hurtado

    We study the macroeconomic effects of internal devaluations undertaken by a periphery
    of countries belonging to a monetary union. We find that internal devaluations have
    large and positive output effects in the long run. Through an expectations channel, most
    of these effects carry over to the short run. Internal devaluations focused on goods
    markets reforms are generally more powerful in stimulating growth than reforms aimed
    at moderating wages, but the latter are less deflationary. For a monetary union with
    a periphery the size of the euro area’s, the countries at the periphery benefit from
    internal devaluations even at the zero lower bound (ZLB) of the nominal interest rate.
    Nevertheless, when the ZLB binds, there is a case for a sequencing of reforms that
    prioritizes labor policies over goods markets reforms.

  • 2015
    Real-time weakness of the global economy: a first assessment of the coronavirus crisis (1 MB) Danilo Leiva-Leon, Gabriel Perez-Quiros and Eyno Rots

    We propose an empirical framework to measure the degree of weakness of the global
    economy in real-time. It relies on nonlinear factor models designed to infer recessionary
    episodes of heterogeneous deepness, and fitted to the largest advanced economies
    (U.S., Euro Area, Japan, U.K., Canada and Australia) and emerging markets (China,
    India, Russia, Brazil, Mexico and South Africa). Based on such inferences, we construct
    a Global Weakness Index that has three main features. First, it can be updated as soon
    as new regional data is released, as we show by measuring the economic effects of
    coronavirus. Second, it provides a consistent narrative of the main regional contributors
    of world economy’s weakness. Third, it allows to perform robust risk assessments based
    on the probability that the level of global weakness would exceed a certain threshold of
    interest in every period of time. With information up to March 2nd 2020, we show that
    the Global Weakness Index already sharply increased at a speed at least comparable
    to the experienced in the 2008 crisis.

  • 2014
    Hedger of last resort: evidence from Brazilian FX interventions, local credit, and global financial cycles (504 KB) Rodrigo Barbone Gonzalez, Dmitry Khametshin, José-Luis Peydró and Andrea Polo

    We show that local central bank policies attenuate global financial cycle (GFC)’s
    spillovers. For identification, we exploit GFC shocks and Brazilian interventions in FX
    derivatives using three matched administrative registers: credit, foreign credit flows to
    banks, and employer-employee. After U.S. Federal Reserve Taper Tantrum (followed
    by strong Emerging Markets FX depreciation and volatility increase), Brazilian banks
    with larger ex-ante reliance on foreign debt strongly cut credit supply, thereby reducing
    firm-level employment. However, a large FX intervention program supplying derivatives
    against FX risks – hedger of last resort – halves the negative effects. Finally, a 2008-2015
    panel exploiting GFC shocks and local related policies confirm these results.

  • 2013
    Financial frictions and the wealth distribution (5 MB) Jesús Fernández-Villaverde, Samuel Hurtado and Galo Nuño

    We postulate a nonlinear DSGE model with a financial sector and heterogeneous
    households. In our model, the interaction between the supply of bonds by the financial
    sector and the precautionary demand for bonds by households produces significant
    endogenous aggregate risk. This risk induces an endogenous regime-switching process
    for output, the risk-free rate, excess returns, debt, and leverage. The regime-switching
    generates i) multimodal distributions of the variables above; ii) time-varying levels of
    volatility and skewness for the same variables; and iii) supercycles of borrowing and
    deleveraging. All of these are important properties of the data. In comparison, the
    representative household version of the model cannot generate any of these features.
    Methodologically, we discuss how nonlinear DSGE models with heterogeneous agents
    can be efficiently computed using machine learning and how they can be estimated with
    a likelihood function, using inference with diffusions.

  • 2012
    External imbalances and recoveries (928 KB) Mariam Camarero, María Dolores Gadea-Rivas, Ana Gómez-Loscos and Cecilio Tamarit

    A decade after the beginning of the Great Recession, flow external imbalances, measured
    by the current account (CA) have narrowed markedly. However, stock or net foreign
    assets (NFA) imbalances have kept increasing and have created challenges for future
    macroeconomic and financial stability. To date, early warning systems (scoreboards) have
    focused more on flow than on the stock variables. To approach this problem, in this paper
    we analyze expansions using two complementary sets of indicators proposed by Harding
    and Pagan (2002) and Gadea et al. (2017). After controlling for a large set of explanatory
    variables, we find that the effect of CA imbalances is limited, except when the measures
    selected take into account past CA developments or some degree of persistence. In
    contrast, the evolution of NFA seems to be much more explanatory of the time it takes
    to regain the level of output previous to the recession, as well as the amplitude and the
    cumulation of the recoveries. Therefore, we conclude that future macro-prudential policies
    should pay more attention to stock variables to measure external imbalances due to their
    effects on the characteristics of recoveries.

  • 2011
    Sentiment analysis of the Spanish Financial Stability Report (1 MB) Ángel Iván Moreno Bernal and Carlos González Pedraz

    This paper presents a text mining application, to extract information from financial
    texts and use this information to create sentiment indices. In particular, the analysis
    focuses on the Banco de España’s Financial Stability Reports from 2002 to 2019 in their
    Spanish version and on the press reaction to these reports. To calculate the indices,
    a Spanish dictionary of words with a positive, negative or neutral connotation has been
    created, to the best of our knowledge the first within the context of financial stability.
    The robustness of the indices is analysed by applying them to different sections of the
    Report, and using different variations of the dictionary and the definition of the index.
    Finally, sentiment is also measured for press reports in the days following the publication
    of the Report. The results show that the list of words collected in the reference dictionary
    represents a robust sample to estimate the sentiment of these texts. This tool constitutes
    a valuable methodology to analyse the repercussion of financial stability reports, while
    objectively quantifying the sentiment conveyed in them.

  • 2010
    Eurozone prices: a tale of convergence and divergence (425 KB) Alfredo García-Hiernaux, María T. González-Pérez and David E. Guerrero

    This article provides a methodology to test absolute and relative price convergence
    (in mean and variance) based on a model of relative prices that includes a transition
    path, and offers a way to measure the speed of price convergence across countries.
    By applying this test to the European Monetary Union (EMU) price indices from 2001 to
    2011, we find empirical evidence of different price level patterns and the lack of price
    level convergence in the long run for most countries. In terms of the price gap between
    countries, only when we compare the German with French and Italian prices, we do get
    zero-gap (absolute) price level convergence. A few other countries report relative price
    level convergence. These results underscore the existence of a “convergence cost” that
    EMU countries with lower price levels paid and that does not tend toward zero in the
    long-term in the absence of convergence. This finding might be of particular interest to
    European monetary policymakers as it implies that implemented monetary policy does
    not affect (benefit/harm) all EMU members equally. Monitoring the relative and absolute
    price level convergence is advised to understand the monetary policy efficiency in
    the long run.

  • 2009
    Trade agreements and Latin American trade (creation and diversion) and welfare (588 KB) Ayman El Dahrawy Sánchez-Albornoz and Jacopo Timini

    This study analyses the process of economic integration in Latin America. Making use
    of a structural gravity model, this paper provides an ex-post assessment of the effect of
    the trade agreements (TAs) signed by Latin American countries on international trade.
    We account for the last wave of TAs proliferation and estimate treaty level effects.
    On average, TAs had a positive effect on Latin American trade. This holds true for both
    intra-Latin American agreements and agreements between Latin American countries
    and the rest of the world. However, we unveil that these average estimates cover
    a substantial degree of heterogeneity across TAs. Additionally, we quantify ex-ante
    general equilibrium effects on the trade volumes and welfare of Latin American
    countries under different scenarios of deeper integration.

  • 2008
    Foreign direct investment and the equity home bias puzzle (491 KB) Sven Blank, Mathias Hoffmann and Moritz A. Roth

    The vast macroeconomic literature trying to explain the widely observed equity home bias
    disregards internationally active firms. In a DSGE model that features the endogenous choice of firms to become internationally active through either exports or foreign direct investment (FDI), we find that the optimal equity holdings of agents are biased towards domestic firms. Our finding indicates that international diversification is not as bad as empirical measures of the equity home bias suggest.

  • 2007
    The benefits are at the tail: uncovering the impact of macroprudential policy on growth-at-risk (2 MB) Jorge E. Galán

    This paper brings together recent developments on the growth-at-risk methodology and the literature on the impact of macroprudential policy. For this purpose, I extend the recent proposals on the use of quantile regressions of GDP growth by including macrofinancial variables with early warning properties of systemic risk, and macroprudential measures. I identify heterogeneous effects of macroprudential policy on GDP growth, uncovering important benefits on the left tail of its distribution. The positive effect of macroprudential policy on reducing the downside risk of GDP is found to be larger than the negative impact on the median, suggesting a net positive effect in the mid-term. Nonetheless, I identify heterogeneous effects depending on the position in the financial cycle, the direction of the policy, the type of instrument, and the time elapsed since its implementation. In particular, tightening capital measures during expansions may take up to two years in evidencing benefits on growth-at-risk, while the positive impact of borrower-based measures is rapidly observed. This suggests the need of implementing capital measures, such as the countercyclical capital buffer, early enough in the cycle; while borrower-based measures can be tightened in more advanced stages. Conversely, in downturns the benefits of loosening capital measures are immediate, while those of borrower-based measures are limited. Overall, this study provides a useful framework to assess costs and benefits of macroprudential policy in terms of GDP growth, and to identify the term-structure of specific types of instruments.

  • 2006
    Strategic interactions and price dynamics in the global oil market (825 KB) Irma Alonso Álvarez, Virginia Di Nino and Fabrizio Venditti

    In a simplied theoretical framework, we model the strategic interactions between OPEC and non-OPEC producers and the implications for the global oil market. Depending on market conditions, OPEC may find it optimal to act either as a monopolist on the residual demand curve, to move supply in-tandem with non-OPEC, or to offset changes in non-OPEC supply. We evaluate the implications of the model through a Structural Vector Auto Regression (VAR) that separates non-OPEC and OPEC production and allows OPEC to respond to supply increases in non-OPEC countries. This is done by either increasing production (Market Share Targeting) or by reducing it (Price Targeting). We find that Price Targeting shocks absorb half of the fluctuations in oil prices, which have left unexplained by a simpler model (where strategic interactions are not taken into account). Price Targeting shocks, ignored by previous studies, explain around 10 percent of oil price fluctuations and are particularly relevant in the commodity price boom of the 2000s. We confirm that the fall in oil prices at the end of 2014 was triggered by an attempt of OPEC to re-gain market shares. We also find the OPEC elasticity of supply three times as high as that of non-OPEC producers.

  • 2005
    Dollar borrowing, firm-characteristics, and FX-hedged funding opportunities (573 KB) Leonardo Gambacorta, Sergio Mayordomo and José María Serena

    We explore the link between firms’ dollar bond borrowing and their FX-hedged funding
    opportunities, as reflected in a positive corporate basis (the relative cost of local to synthetic currency borrowing). Consistent with previous research, we first document that firms substitute domestic for dollar borrowing when they have higher dollar revenues or long-term assets and when the corporate basis widens. Importantly, our novel firm-level dataset enables to show that when these funding opportunities appear, the currency substitution is stronger for very high-grade firms, as they can offer to investors close substitutes for safe dollar assets. However, firms with higher dollar revenues or long-term assets do not react to changes in the corporate basis. Altogether, the composition of dollar borrowers shifts when the basis widens, as high-grade firms gain importance, relative to firms with operational needs.

  • 2004
    From secular stagnation to robocalypse? Implications of demographic and technological changes (919 KB) Henrique S. Basso and Juan F. Jimeno

    Demographic change and automation are two main structural trends shaping the
    macroeconomy in the next decades. We present a general equilibrium model with
    a tractable life-cycle structure that allows the investigation of the main transmission
    mechanisms by which demography and technology affect economic growth. Due to
    a trade-off between innovation and automation, lower fertility and population ageing
    lead to reductions in GDP per capita growth and the labour income share. During the
    demographic transition, the extent growth and factor shares are affected depends on
    alternative labour market configurations and scenarios for the integration of robots
    in economic activity.

  • 2003
    Measuring the procyclicality of impairment accounting regimes: a comparison between IFRS 9 and US GAAP (2 MB) Alejandro Buesa, Francisco Javier Población García and Javier Tarancón

    The purpose of this paper is to compare the cyclical behavior of various credit impairment
    accounting regimes, namely IAS 39, IFRS 9 and US GAAP. We model the impact of credit
    impairments on the Prot and Loss (P&L) account under all three regimes. Our results
    suggest that although IFRS 9 is less procyclical than the previous regulation (IAS 39), it is
    more procyclical than US GAAP because it merely requests to provision the expected loss
    of one year under Stage 1 (initial category). Instead, since US GAAP prescribes that lifetime
    expected losses are fully provisioned at inception, the amount of new loans originated is
    negatively correlated with realized losses. This leads to relatively higher (lower) provisions
    during the upswing (downswing) phase of the financial cycle. Nevertheless, the lower
    procyclicality of US GAAP seems to come at cost of a large increase in provisions.

  • 2002
    ¿Cómo afecta la complejidad de la regulación a la demografía empresarial? Evidencia para España (1 MB) Juan S. Mora-Sanguinetti and Ricardo Pérez-Valls

    The volume and fragmentation of regulation are important for business demography. They
    may imply that the market is divided, reducing firm size and their chances of benefiting
    from economies of scale. This paper has two objectives: it analyzes the results of a new
    database on regulation in Spain and explores the impacts of the complexity of the regulatory
    framework on business demography. The volume of new norms enacted in Spain has
    increased by four-fold since the end of the 70s, reaching 11,737 regulations in 2018. The
    results of our analysis indicate that the complexity of the regulatory framework, broken down
    at the local level, is negatively related to the total number of firms in Spain and to firm entry
    (reducing the capital of the new firms). This conclusion hides an interesting composition
    effect: the complexity is negatively related to the presence of limited liability companies (SL),
    which have a larger size and could take advantage of economies of scale (doing business
    throughout the territory). However, it is positively related to the presence of individuals with
    business activity (which are smaller) and which may have activities connected with local
    regulations and local markets. The analysis proposed in this paper is relevant for the study
    of productivity in Spain.

  • 2001
    Debt sustainability and fiscal space in a heterogeneous Monetary Union: normal times vs the zero lower bound (668 KB) Javier Andrés, Pablo Burriel and Wenyi Shen

    In this paper we study fiscal policy effects and fiscal space for countries in a monetary union
    with different levels of public debt. We develop a dynamic stochastic general equilibrium
    (DSGE) model of a two-country monetary union, calibrated to match the characteristics of Spain and Germany, in which debt sustainability is endogenously determined a la Bi (2012) to shape the responses of the risk premium on public debt. Policy shocks change the market’s expectation about future primary surplus, producing a direct effect on the sovereign risk premium and macroeconomic responses of the economy. In normal times the costs of a government spending driven fiscal consolidation in the high-debt country are greatly diminished when this consolidation improves endogenously its debt sustainability prospects. Fiscal consolidations in both members of the monetary union decrease real interest rates and amplify the reduction in risk premium in the highly-indebted country, improving union-wide output in the long run, but at the cost of lower output in the low-debt country in the short term. On the contrary, when monetary policy is constrained at the zero lower bound, the risk premium channel arising from the endogenous determination of debt sustainability becomes muted. In the ZLB, a fiscal consolidation generates deflation expectations which increase the real interest rate and may compensate partially or completely, depending on the calibration, the benefits from a lower risk premium. In this context, a fiscal expansion in the low-debt country and a consolidation in the high-debt country delivers the greater positive impact on union-wide output. Finally, the risk premium channel only affects countries with medium or low levels of public debt indirectly through the negative spillovers from other high-debt members of the monetary union.

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