Publications

This paper presents original evidence on price setting in the euro area at the individual level. We use micro data on consumer (CPI) and producer (PPI) prices, as well as survey information. Our main findings are: (i) prices in the euro area are sticky and more so than in the US; (ii) there is evidence of heterogeneity and of asymmetries in price setting behaviour; (iii) downward price rigidity is only slightly more marked than upward price rigidity and (iv) implicit or explicit contracts and coordination failure theories are important, whereas menu or information costs are judged much less relevant by firms.

Previous studies show that existing correlations between national returns are higher than correlations between the national growth rates of fundamental variables. This paper examines the ability of intertemporal asset pricing models to explain crosscountry correlations of national returns. We find that when capital markets are assumed to be fully integrated, a simple intertemporal general equilibrium model is able to explain the observed co variability of domestic asset returns but generates too little variability in those returns. Results improve considerably if a less restrictive version is employed. In that setting, both domestic variability and cross country co variability of returns are consistent with capital market integration.

This paper presents an empirical analysis of transmission rates from exchange rate movements to import prices, across countries and product categories, in the euro area over the last fifteen years. Our results show that the transmission of exchange rate changes to import prices in the short run is high, although incomplete, and that it differs across industries and countries; in the long run, exchange rate pass through is higher and close to one. We find no strong statistical evidence that the introduction of the euro caused a structural change in this transmission. Although estimated point elasticities seem to have declined since the introduction of the euro, we find little evidence of a structural break in the transmission of exchange rate movements except in the case of some manufacturing industries. And since the euro was introduced, industries producing differentiated goods have been more likely to experience reduced rates of exchange rate pass through to import prices. Exchange rate changes continue to lead to large changes in import prices across euro area countries.

This paper reports the results of a survey carried out by the Banco de España on a sample of around 2000 Spanish firms to deepen the understanding of firms' price setting behaviour. The main findings may be summarised as follows. Most Spanish firms are price setters that use predominantly state dependent rules or a combination of time and state dependent rules when reviewing their prices. Changes in costs are the main factor underlying price increases, whereas changes in market conditions (demand and competitors' prices) are the main driving forces of price decreases. The degree of price flexibility is directly related to the share of energy inputs over total costs and to the intensity of competition, whereas it is inversely linked to the labour share. The three theories of price stickiness that receive the highest empirical support are implicit contracts, coordination failure and explicit contracts.

This study investigates the pricing behaviour of firms in the euro area on the basis of surveys conducted by nine Eurosystem national central banks. Overall, more than 11,000 firms participated in the survey. The results are very robust across countries. Firms operate in monopolistically competitive markets, where prices are mostly set following mark-up rules and where price discrimination is a common practice. Our evidence suggests that both time- and state-dependent pricing strategies are applied by firms in the euro area: around one-third of the companies follow mainly time-dependent pricing rules while two-thirds use pricing rules with some element of state-dependence. Although the majority of firms take into account a wide range of information, including past and expected economic developments, about one-third adopts a purely backward-looking behaviour. The pattern of results lends support to the recent wave of estimations of hybrid versions of the New Keynesian Phillips Curve. Price stickiness arises both at the stage when firms review their prices and again when they actually change prices. The most relevant factors underlying price rigidity are customer relationships –as expressed in the theories about explicit and implicit contracts– and thus, are mainly found at the price changing (second) stage of the price adjustment process. Finally, we provide evidence that firms adjust prices asymmetrically in response to shocks, depending on the direction of the adjustment and the source of the shock: while cost shocks have a greater impact when prices have to be raised than when they have to be reduced, reductions in demand are more likely to induce a price change than increases in demand.

En este trabajo se estima un modelo para analizar los determinantes de la financiación de las sociedades no financieras españolas a nivel agregado. Los resultados muestran que la financiación depende, en el largo plazo, positivamente del nivel de actividad económica y negativamente de los tipos de interés. La elasticidad a la variable de escala se encuentra en el rango de valores estimados para otros países, mientras que la semielasticidad al tipo de interés resulta ser relativamente elevada. En el corto plazo, además, se obtiene una relación negativa con los beneficios de las empresas y con la evolución de los mercados de renta variable. Estos resultados apuntan a que el crecimiento de la financiación de las sociedades en los últimos años está en línea con la evolución de sus determinantes de largo plazo, si bien el aumento en los niveles de endeudamiento supone una mayor exposición del sector a variaciones inesperadas en los resultados económicos y en el coste de los fondos.

Using information on individual products obtained from the Food Consumption Panel, quality-adjusted price indices have been constructed, by type of establishment, for a representative set of fresh foods purchased by Spanish households. As the Food Consumption Panel does not provide information on product quality, the information available on household characteristics has been used to obtain such indices. With these indices it has been possible to analyse the differences in changes in fresh food prices, according to the type of establishment at which the products are acquired.

This paper finds strong empirical support of a positive, although quite lagged, relationship between rapid credit growth and loan losses. Moreover, it contains empirical evidence of more lenient credit terms during boom periods, both in terms of screening of borrowers and in collateral requirements. Therefore, we confirm the predictions from theoretical models based on disaster myopia, herd behaviour institutional memory and agency problems between banks' managers and shareholders regarding the incentives of the former to engage in too expansionary credit policies during lending booms. The paper also develops a prudential tool, based on loan loss provisions, for banking regulators in order to cope with the former problem.

This paper investigates the level and determinants of retail banking interest rate differences among Spanish banks in the period 1989 2003. We find that interest rates of twenty five different bank loan and deposit products adjust rather rapidly to their long term values in response to external shocks, as the relative version of the Law of One Price predicts, but the evidence runs contrary to the absolute version of the Law. Different credit risk across banks and loan products is an important source of interest rate dispersion in the short and long run that puts limits to banking integration.

Este trabajo presenta un modelo empírico de las decisiones de gasto de las familias españolas –consumo e inversión residencial–. El modelo, que se inscribe en la tradiciín de los modelos con mecanismo de corrección del error, adopta un enfoque multivariante y consta de varias ecuaciones y varios mecanismos de corrección [vector error correction model (VECM)], que representan las desviaciones respecto a la senda de largo plazo del consumo y de la inversión residencial. Este modelo permite contemplar la existencia de varios mecanismos para reequilibrar el sistema –a través de la renta y de la riqueza–, que son compatibles, en el caso de España, con la existencia de una "función de consumo" tradicional. Junto a la función de consumo, que se modeliza desagregando entre bienes de consumo duradero y no duradero, el modelo incluye una relación de largo plazo para la inversión en vivienda, que es función de la renta de las familias, la riqueza, el tipo de interés real y la variación esperada del precio de la vivienda. El modelo estimado da cuenta de importantes efectos de la riqueza sobre el consumo y la inversión residencial, así como de una notable influencia del tipo de interés real sobre esta última variable y sobre el precio de la vivienda.

This paper documents patterns of price setting at the retail level in the euro area. A set of stylized facts on the frequency and size of price changes is presented along with an econometric investigation of their main determinants. Price adjustment in the euro area can be summarized in six stylized facts. First, prices of most products change rarely. The average monthly frequency of price adjustment is 15 p.c., compared to about 25 p.c. in the US. Second, the frequency of price changes is characterized by substantial cross-product heterogeneity and pronounced sectoral patterns: prices of oil-related) energy and unprocessed food products change very often, while price adjustments are less frequent for processed food products, non-energy industrial goods and services. Third, cross-country heterogeneity exists but is less pronounced. Fourth, price decreases are not uncommon. Fifth, price increases and decreases are sizeable compared to aggregate and sectoral inflation rates. Sixth, price changes are not highly synchronized across price-setters. Moreover, the frequency of price changes in the euro area is related to a number of factors, in particular seasonality, outlet type, indirect taxation, use of attractive prices as well as aggregate or product-specific inflation.

This paper identifies the basic features of price setting behaviour at the producer level in the Spanish economy using a large dataset containing the micro data underlying the construction of the PPI over the period 1991 1999. The paper explores how these general features are affected by some specific factors (cost structure, degree of competition, demand conditions, government intervention, level of inflation, seasonality, and the practice of using attractive prices) and presents a comparison of price setting practices at the producer and at the consumer level to ascertain whether the retail sector augments or mitigates price stickiness. We find that prices do not change often but do so by a large amount. The cost structure, proxied by the labour share and the relevance of raw materials, and the degree of competition, proxied by import penetration, affect price flexibility. We also find some evidence that producer prices are more flexible than consumer prices.

This paper provides an approximation to the measurement of public sector wage gaps in Spanish regions. By using data from the European Community Household Panel, it is shown that the balance between what private firms pay in the local market and what the public sector pays, differs substantially in different areas of the country. Public sector wage differences among Spanish regions are mostly due to differences in returns, not to differences in characteristics or to selection effects, and are not constant across gender, educational levels, or occupations. Moreover, in those regions where Regional Governments have a higher weight in public employment, public wage gaps are higher and public employers pay higher returns. There also seems to be a cross regional positive correlation between public wage gaps and unemployment, and a negative one between labour productivity and public wage gaps. Hence, a tentative conclusion is that the incentives to select into the public sector are higher in the low productivity regions, precisely those where scarcity of human capital in the private sector may be the most important factor for explaining economic backwardness.

This paper analyzes the determinants and implications for financial stability of the mix of international banks' claims countries receive. In particular, we distinguish between local claims, extended by international banks through their affiliates in a host (or claim recipient) country, and cross border claims, booked from outside the host country, typically from banks' headquarters in their home countries. Using data on US, Spanish, and Italian banks' foreign claims across countries, we find that the share of local foreign claims is primarily driven by the degree of "freedom" in the host banking sector and by business opportunities in the local market. Entry requirements, startup and informational costs associated with international banking also play a role, but their influence is less robust. Finally, we find that the mix of international bank claims has implications for financial stability, since foreign claim volatility is lower in countries that receive a larger share of local claims.

The ARIMA model based methodology of programs TRAMO and SEATS for seasonal adjustment and trend cycle estimation was applied to the exports, imports, and balance of trade Japanese series in Maravall (2002). The programs were used in an automatic mode, and the results analyzed. The present paper contains an extension of the work. First, some improvements in the automatic modelling procedure are illustrated, and the models for the seasonally adjusted series and its trend cycle component are discussed (in particular, their order of integration). It is further shown how the SEATS output can be of help in model selection. Finally, the important problem of the choice between direct and indirect adjustment of an aggregate is addressed. It is concluded that, because aggregation has a strong effect on the spectral shape of the series, and because seasonal adjustment is a non linear transformation of the original series, direct adjustment is preferable, even at the cost of destroying identities between the original series.

This paper explores the impact of actual exchange rate regimes on fiscal discipline, which we purportedly link to the effect of announcing the peg and to the availability of external funds. To stress this point, the focus of the analysis is emerging markets spanning from the beginning of the nineties, given the importance of financial integration in the last fifteen years and the centrality of external financing for these countries. We empirically show that announcing the pegs has deleterious effects on fiscal discipline, while "de facto" pegs which have not been announced deliver superior fiscal outcomes. The evidence suggests that this is due to the initial positive credibility shock of the announcement, which allows for easier and less costly access to the financing of fiscal deficits in emerging countries.

A major criticism of standard specifications of price adjustment in models for monetary policy analysis is that they violate the natural rate hypothesis by allowing output to differ from potential in steady state. In this paper we estimate a dynamic optimizing business cycle model whose price-setting behavior satisfies the natural rate hypothesis. The priceadjustment specifications we consider are the sticky-information specification of Mankiw and Reis (2002) and the indexed contracts of Christiano, Eichenbaum, and Evans (2005). Our empirical estimates of the real side of the economy are similar whichever price adjustment specification is chosen. Consequently, the alternative model specifications deliver similar estimates of the U.S. output gap series, but the empirical behavior of the gap series differs substantially from standard gap estimates.

Galí and Gertler (1999) developed a hybrid variant of the New Keynesian Phillips curve that relates inflation to real marginal cost, expected future inflation and lagged inflation. GMM estimates of the model suggest that forward looking behavior is dominant: The coefficient on expected future inflation substantially exceeds the coefficient on lagged inflation. While the latter differs significantly from zero, it is quantitatively modest. Several authors have suggested that our results are the product of specification bias or suspect estimation methods. Here we show that these claims are incorrect, and that our results are robust to a variety of estimation procedures, including GMM estimation of the closed form, and nonlinear instrumental variables. Also, as we discuss, many others have obtained very similar results to ours using a systems approach, including FIML techniques. Hence, the conclusions of GG and others regarding the importance of forward looking behavior remain robust.

This paper analyzes if each European country presents business cycles that are similar enough to validate what some authors call the European cycle. Contrary to the majority of papers on business cycles, we concentrate on the appearance of the cycle, not on the synchronization. We provide a robust methodology for dating and characterizing business cycles and their phases and adopt the model-based cluster analysis to test the existence of an unique cluster (a common cycle) against more than one. We find evidence against a common cycle. Finally, we find no clear relation between similarities in business cycle appearance and synchronization across countries.

We analyze empirically whether the emergence of China as a large recipient of FDI has affected the amount of FDI received by Latin American countries. For the longest time span possible given data availability (from 1984 to 2001), we do not find a substitution from Latin American inward FDI to China, when other relevant factors are taken into account. However, concentrating on the last few years (from 1995 to 2001), when FDI boomed worldwide and negotiations for China's WTO membership accelerated, the "Chinese" effect becomes highly significant. Assessing the impact country by country, China's inward FDI appears to have hampered that of Mexico and Colombia.

This paper looks at the performance record of M&As that took place in the European Union financial industry in the period 1998-2002. First, the paper reports evidence on shareholder returns from the merger. Merger announcements implied positive excess returns to the shareholders of the target company around the date of the announcement, with a slight positive excess-return on the 3 months period prior to announcement. Returns to shareholders of the acquiring firms were essentially zero around announcement. One year after the announcement, excess returns were not significantly different from zero for both targets and acquirers. The paper also provides evidence on changes in the operating performance for the subsample of merges involving banks. M&As usually involved targets with lower operating performance than the average in their sector. The transaction resulted in significant improvements in the target banks performance beginning on average two years after the transaction was completed. Return on equity of the target companies increased by an average of 7%, and these firms also experience efficiency improvements.

In this paper we present some descriptive evidence and simulation exercises with both an estimated backward looking model and a calibrated general equilibrium forward looking model that allow some light to be shed on the determinants and macroeconomic implications of persistent inflation differentials in Spain within EMU. We show that a demand expansion biased towards consumption of non-tradable goods and real-wage rigidities –such as wage indexation clauses– are among the key determinants of diverging price developments in Spain. Moreover, we find that in those conditions the stabilising mechanism of terms of trade effects is relatively weak, although the economy undergoes lasting losses in competitiveness.

This paper uses evidence from the British Household Panel Survey (BHPS) to examine how attitudes towards unsecured debt are related to household finances and other characteristics. An ordered logit model is estimated for 1995 and 2000 using a self reported indicator of financial distress as the dependent variable. This analysis suggests that the main factors causing debt problems are the unsecured debt income ratio, the level of mortgage income gearing, the level of financial wealth of households, their health, ethnicity and marital status. While the proportion of households reporting debt problems did not change between 1995 and 2000, there were important shifts among different groups. In particular, more households in the youngest age group reported debt repayments were a heavy burden in 2000, while the opposite applies to the oldest age group where a smaller proportion of households than in 1995 reported debt was a heavy burden. These changes can largely be accounted for by the changing economic circumstances of these groups rather than an unrelated shift in attitudes. In particular, the increase in indebtedness of the young was the main factor accounting for their greater tendency to report debt problems.

Household indebtedness has risen sharply in recent years, with large increases in both secured and unsecured borrowing. In this paper, waves 5 and 10 of the British Household Panel Survey (BHPS) for 1995 and 2000 are used to examine the determinants of participation in the unsecured debt market and the amount borrowed. Probit models for participation are estimated and age, income, positive financial prospects and housing tenure are found to be very significant and have the expected sign according to a life cycle model for consumption. Regressions to explain the level of borrowing by individuals suggest that income is the main variable explaining cross sectional differences in unsecured debts.
The increase in aggregate unsecured debt between 1995 and 2000 does not seem to be closely linked to changes in the determinants of debt market participation and has been mainly associated with the larger amounts borrowed by those with debts. Increases in income, better educational qualifications and improved prospects regarding the financial situation contributed to this result. The major part of the overall increase in unsecured debt is not explained by variables at the individual level, but is accounted for by common, unmodelled macroeconomic factors.

In many countries, Employment Protection Legislation (EPL) establishes different regulations for certain groups of workers who face more disadvantages in the labor market (young workers, women, unskilled workers, etc.) with the aim of improving their employability. Well known examples are the introduction of atypical employment contracts (e.g., temporary and determined duration contracts) which ease firing restrictions for some, but not all, workers.
This paper discusses the effects of EPL varying among workers of different skills on the level and composition of unemployment, job flows, productivity and welfare. By using an extension of Mortensen Pissarides' (1994) search model where heterogeneous workers compete for the same jobs, we are able to identify several key channels through which changing firing costs for some groups of workers affects hiring and firing of all workers and, hence, may have a different impact on aggregate labor market variables than reducing firing costs across the board. Some analytical and simulation results also show that these effects of differentiated firing costs by workers' skills may be different depending upon the initial state of the labor market.

This paper develops a comprehensive framework for the quantitative analysis of the private and fiscal returns to schooling and of the effect of public policies on private incentives to invest in education. This framework is applied to 14 member states of the European Union. For each of these countries, we construct estimates of the private return to an additional year of schooling for an individual of average attainment, taking into account the effects of education on wages and employment probabilities after allowing for academic failure rates, the direct and opportunity costs of schooling, and the impact of personal taxes, social security contributions and unemployment and pension benefits on net incomes. We also construct a set of effective tax and subsidy rates that measure the effects of different public policies on the private returns to education, and measures of the fiscal returns to schooling that capture the long term effects of a marginal increase in attainment on public finances under conditions that approximate general equilibrium.

One of the most extended empirical stylized facts about output dynamics in the United States is the positive autocorrelation of output growth. This paper shows that the positive autocorrelation can be better captured by shifts between business cycle states rather than by the standard view of autoregressive coefficients. This result is extremely robust to different nonlinear alternative models and also applies not only to output but to the most relevant macroeconomic variables.

This paper assesses empirically whether global risk aversion (GRA) and some if its determinants (US economic growth and the US long term interest rates) explain developments in Latin American sovereign spreads. We find that GRA is significant and positively related to Latin American sovereign spreads and that its impact varies across countries and over time. Chile, with a lower sovereign risk, is relatively more affected. The opposite is true for Argentina, Ecuador and Venezuela. In addition, the influence of GRA on spreads has risen since the Enron scandal. Finally, both an increase in US economic growth and US long term interest rates are found to reduce spreads while the opposite is true for US short term interest rates.

The main objective of this paper is to test whether the risk neutral densities (RNDs) implied in the prices of the future options contract on the Spanish IBEX 35 index accurately predict the distribution of future outcomes of the underlying asset. We estimate RNDs using both parametric and nonparametric procedures. We find that between 1996 and 2003 we cannot reject the hypothesis that the RNDs provide accurate predictions of the distributions of future realisations of the IBEX 35 index at four week horizon. However, this result is not robust by subperiods. In particular, from October 1996 to February 2000, we find that RNDs are not able to consistently predict the actual realisations of returns. In this period, option prices assign a low risk neutral probability to large rises compared with realisations. Tests based on the tails of the distribution show that RNDs significantly understate the right tail of the distribution for both the whole period and the first subperiod.

I examine the postulates of the Fiscal Theory of the Price Level (FTPL) under a nominal interest rate peg. First, I show that the usual definition of a non-Ricardian plan involves a number of government's non-credible policy commitments, thus confuting the interpretation of the FTPL as a policy-based equilibrium selection device. The main novelty of this criticism is that it is based on the same core assumptions maintained by this theory: there is a positive stock of governmentissued assets at the beginning of the history owned by the households, flow of funds constraints must be respected in every contingency, although transversality conditions may be violated at off-equilibrium prices.
Then I investigate some additional necessary conditions that allow the government to implement non-Ricardian fiscal plans that result in a unique equilibrium under an interest rate peg. A critical necessary condition for the credibility of such a fiscalist plan is that the equilibrium level of seigniorage must be non-positive. I argue that the fiscalist stock-analogy, under this monetary rule, is only meaningful, precisely, when money enters into the government constraint as a destination of funds, rather than as a source.