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 the Working Papers published since 1990 are available here. Earlier ones, going back to the first one published in 1978, are available in the Institutional RepositoryOpens in a new window

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  • 27/12/2012
    1243. Growth empirics in panel data under model uncertainty and weak exogeneity (591 KB) Enrique Moral-Benito

    This paper considers panel growth regressions in the presence of model uncertainty and reverse causality concerns. For this purpose, my econometric framework combines Bayesian Model Averaging with a suitable likelihood function for dynamic panel models with weakly exogenous regressors and fixed effects. An application of this econometric methodology to a panel of countries over the 1960-2000 period indicates that there is no robust determinant of economic growth and that the rate of conditional convergence is indistinguishable from zero.

  • 27/12/2012
    1242. Traded and nontraded goods prices, and international risk sharing: an empirical investigation (820 KB) Giancarlo Corsetti, Luca Dedola and Francesca Viani

    Accounting for the pervasive evidence of limited international risk sharing is an important hurdle for open-economy models, especially when these are adopted in the analysis of policy trade-offs likely to be affected by imperfections in financial markets. Key to the literature is the evidence, at odds with efficiency, that consumption is relatively high in countries where its international relative price (the real exchange rate) is also high. We reconsider the relation between cross-country consumption differentials and real exchange rates, by decomposing it into two components, reflecting the prices of tradable and nontradable goods, respectively. We document that, as a common pattern among OECD countries, both components tend to contribute to the overall lack of risk sharing, with the tradable price component playing the dominant role in accounting for efficiency deviations. We relate these findings to two mechanisms proposed by the literature to reconcile open economy models with the data. One features strong Balassa-Samuelson effects on nontradable prices due to productivity gains in the tradable sector, with a muted offsetting response of tradable prices. The other, endogenous income effects causing nontradable but especially tradable prices to appreciate with a rise in domestic consumption demand.

    Published in: NBER Chapters, in: NBER International Seminar on Macroeconomics 2011, pp. 403-466, National Bureau of Economic Research, Inc. (2011)

  • 21/12/2012
    1241. Heterogeneity and cross-country spillovers in macroeconomic-financial linkages (846 KB)

     Published as:  “Commonalities and cross-country spillovers in macroeconomic-financial linkages”. The B.E. Journal of Macroeconomics, 2016. Vol. 16(1), pp. 231–275Opens in a new window

    Matteo Ciccarelli, Eva Ortega and Maria Teresa Valderrama

    We investigate heterogeneity and spillovers in macro-financial linkages across developed economies, with a particular emphasis on the most recent recession. A panel Bayesian VAR model including real and financial variables identifi es a statistically significant common component, which proves to be very significant during the most recent recession. Nevertheless, countryspecific factors remain important, which explains the heterogeneous behaviour across countries observed over time. Moreover, spillovers across countries and between real and financial variables are found to matter: a shock to a variable in a given country affects all other countries, and the transmission seems to be faster and deeper
    between financial variables than between real variables. Finally, shocks spill over in a heterogeneous way across countries.

  • 17/12/2012
    1240. The failure to predict the Great Recession. The failure of academic economics? A view focusing on the role of credit (860 KB) Maria Dolores Gadea Rivas and Gabriel Perez-Quiros

    Much has been written about why economists failed to predict the latest financial and real crisis. Reading the recent literature, it seems that the crisis was so obvious that economists must have been blind when looking at data not to see it coming. In this paper, we analyze whether such claims are justified by looking at one of the most cited and relevant variables in this analysis, the now infamous credit to GDP chart. We compare the conclusions reached in the literature after the crisis with the results that could have been drawn from an ex ante  analysis. We show that, even though credit affects the business cycle in both the expansion and the recession phases, this effect is almost negligible and impossible to exploit from a policymaker’s point of view.

  • 12/12/2012
    1239. Why did high productivity growth of banks precede the financial crisis? (870 KB) Alfredo Martín-Oliver, Sonia Ruano and Vicente Salas-Fumás

    The observed high levels of banks’ operating efficiency, profits and market values in the years before the financial crisis raise reasonable doubts about the information content of conventional performance measures for the accurate assessment of the efficiency of banking intermediation. In this paper we estimate the productivity of individual Spanish banks and the industry’s productivity growth over time using the methodology of Olley and Pakes (1996) and Levinsohn and Petrin (2003), which controls for simultaneity bias. We then examine the contributions of two sets of factors to productivity growth: banking practices that have been signalled as the proximate causes of the crisis, and technical progress in the industry. We obtain that more than two thirds of the estimated productivity growth in the years 2000-2007 is attributable to practices such as the expansion of the housing market, the high recourse to securitization and short-term finance, and the leveraging of banks’ balance sheets. The remaining 2.8% cumulative annual growth rate is our estimate for the technical progress in the industry, similar to the estimated rate in the period 1993-2000.

  • 05/11/2012
    1238. The dynamics of hours workedand technology (915 KB) Cristiano Cantore; Filippo Ferroni; Miguel A. León-Ledesma

    We study the relationship between hours worked and technology during the postwar period in the US. We show that the responses of hours to technological improvements have increased over time, and that the patterns captured by the SVAR are consistent with those obtained from an RBC model with a less than unitary elasticity of substitution between capital and labor. Data supports the hypothesis that the observed changes in the response of hours to a technology shock are attributable to changes in the magnitude of the degree of capital-labor substitution, sigma. We argue that the observed time-variation in sigma can arise from changes in the structural  composition of sectors (or factors) in a heterogeneous inputs production function or from biases in technological change

  • 11/10/2012
    1237. Minimum wages: do they really hurt young people? (651 KB) Sofía Galán and Sergio Puente

    We estimate the effects of a significant increase in the minimum wage in Spain between 2004 and 2010 on the individual probability of losing employment, using a large panel of social security records. Our main finding is that older people experienced the largest increase in the probability of losing their job, when compared with other age groups, including young people. The intuition is simple: among the affected (low-productivity) workers, young people are expected to increase their productivity more than older ones, who are in the flat part of their life-cycle productivity curve. Consequently, an employer facing a uniform increase in the minimum wage may find it profitable to retain young employees and to fire older ones.

  • 10/10/2012
    1236. The safety and soundness effects of bank M&As in the EU: Does prudential regulation have any impact? (596 KB) Jens Hagendorff, María J. Nieto and Larry D. Wall

    This paper studies the impact of European bank mergers and acquisitions on changes in key safety and soundness measures of both acquirers and targets. We find that capitalization, profitability and liquidity show signs of statistically and economically significant mean reversion for acquirers. Also, acquirers in cross-border deals tended to perform better when their home country prudential supervisors and deposit insurance funding systems were stricter than the target‘s. For target banks, the most consistent findings from the crosssectional regressions are that stronger supervision and tougher deposit insurance funding regimes tend to result in positive post-merger changes in liquidity and performance.

  • 10/10/2012
    1235. Can we use seasonally adjusted indicators in dynamic factor models? (1 MB) Maximo Camacho, Yuliya Lovcha and Gabriel Perez-Quiros

    We examine the short-term performance of two alternative approaches to forecasting using dynamic factor models. The first approach extracts the seasonal component of the individual indicators before estimating the dynamic factor model, while the alternative uses the nonseasonally adjusted data in a model that endogenously accounts for seasonal adjustment. Our Monte Carlo analysis reveals that the performance of the former is always comparable to or even better than that of the latter in all the simulated scenarios. Our results have important implications for the factor models literature because they show that the common practice of using seasonally adjusted data in this type of model is very accurate in terms of forecasting ability. Drawing on five coincident indicators, we illustrate this result for US data.

  • 25/09/2012
    1234. Why do Spanish firms rarely use the bankruptcy system? The role of the mortgage institution (845 KB) Miguel García-Posada and Juan S. Mora-Sanguinetti

    Taking advantage of a rich database of more than 1 million companies in Spain, France and the U.K., we propose and test a hypothesis to explain why Spain has one of the world’s lowest business bankruptcy rates, even during the current economic crisis and after controlling for market exit rates. This hypothesis is based on two premises, the low efficiency of the Spanish bankruptcy system relative to that of an alternative insolvency institution, the mortgage system, and the unattractiveness of the personal bankruptcy law.

  • 20/09/2012
    1233. Fiscal forecast errors: governments vs independent agencies? (548 KB) Rossana Merola and Javier J. Pérez

    The fact that the literature tends to find optimistic biases in national fiscal projections has led to a growing recognition in the academic and policy arenas of the need for independent forecasts in the fiscal domain, prepared by independent agencies, such as the European Commission in the case of Europe. Against this background the aim of this paper is to test: (i) whether the forecasting performance of governments is indeed worse than that of international organizations, and (ii) whether fiscal projections prepared by international organizations are free from political economy distortions. The answer to these both questions is no: our results, based on real-time data for 15 European countries over the period 1999-2007, point to the rejection of the two hypotheses under scrutiny. We motivate the empirical analysis on the basis of a model in which an independent agency tries to minimize the distance to the government forecast. Starting from the assumption that the government’s information set includes private information not available to outside forecasters, we show how such a framework can help in understanding the observed empirical evidence.

  • 20/09/2012
    1232. Valuation of VIX derivatives (853 KB) Javier Mencía and Enrique Sentana

    We conduct an extensive empirical analysis of VIX derivative valuation models before, during and after the 2008-2009 financial crisis. Since the restrictive mean reversion and heteroskedasticity features of existing models yield large distortions during the crisis, we propose generalisations with a time varying central tendency, jumps and stochastic volatility, and analyse their pricing performance, and implications for term structures of VIX futures and volatility «skews». We find that a process for the log of the observed VIX combining central tendency and stochastic volatility reliably prices VIX derivatives. We also uncover a significant risk premium that shifts the long-run volatility level.

  • 19/09/2012
    1231. Does the IMF’s official support affect sovereign bond maturities? (735 KB) Aitor Erce

    This paper looks at whether the tendency of some governments to borrow short term is reinforced by financial support from the International Monetary Fund. I first present a model of sovereign debt issuance at various maturities featuring endogenous liquidity crises and maturity mismatches due to financial underdevelopment. I use the model to analyse the impact of IMF lending during debt crises on the sovereign’s optimal maturity structure. Within the model, although IMF assistance is able to catalyse private fl ows, this provides incentives for government to issue larger amounts of short-term debt, making the roll-over problem larger. I take the model to the data and find support for the hypothesis that IMF lending leads countries to increase their short-term borrowing. Additionally, I do not find any positive effect of IMF lending on countries’ ability to tap international capital markets. These results helps explain why a catalytic effect of IMF lending has proved empirically elusive.

    Published in: Federal Reserve Bank of Dallas, Working Paper N 128

  • 12/09/2012
    1230. A model for vast panels of volatilities (954 KB) Matteo Luciani and David Veredas

    Realized volatilities, when observed over time, share the following stylised facts: comovements, clustering, long-memory, dynamic volatility, skewness and heavy-tails. We propose a dynamic factor model that captures these stylised facts and that can be applied to vast panels of volatilities as it does not suffer from the curse of dimensionality. It is an enhanced version of Bai and Ng (2004) in the following respects: i) we allow for longmemory in both the idiosyncratic and the common components, ii) the common shocks are conditionally heteroskedastic, and iii) the idiosyncratic and common shocks are skewed and heavy-tailed. Estimation of the factors, the idiosyncratic components and the parameters is simple: principal components and low dimension maximum likelihood estimations. A Monte Carlo study shows the usefulness of the approach and an application to 90 daily realized volatilities, pertaining to S&P100, from January 2001 to December 2008, evinces, among others, the following findings: i) All the volatilities have long-memory, more than half in the nonstationary range, that increases during financial turmoils. ii) Tests and criteria point towards one dynamic common factor driving the co-movements. iii) The factor has larger long-memory than the assets volatilities, suggesting that long-memory is a market characteristic. iv) The volatility of the realized volatility is not constant and common to all. v) A forecasting horse race against 8 competing models shows that our model outperforms, in particular in periods of stress.

  • 07/08/2012
    1229. Which model to match? (601 KB) Matteo Barigozzi, Roxana Halbleib and David Veredas

    The asymptotic efficiency of indirect estimation methods, such as the efficient method of
    moments and indirect inference, depends on the choice of the auxiliary model. To date,
    this choice has been somewhat ad hoc and based on an educated guess. In this article we
    introduce a class of information criteria that helps the user to optimize the choice between
    nested and non–nested auxiliary models. They are the indirect analogues of the widely used
    Akaike–type criteria. A thorough Monte Carlo study based on two simple and illustrative
    models shows the usefulness of the criteria.

  • 27/07/2012
    1228. Marginal quantiles for stationary processes (685 KB) Yves Dominicy, Siegfried Hörmann, Hiroaki Ogata and David Veredas

    We establish the asymptotic normality of marginal sample quantiles for S-mixing vector stationary processes. S-mixing is a recently introduced and widely applicable notion of dependence. Results of some Monte Carlo simulations are given.

    Published in: Statistics and Probability Letters 83, 28–36 (2013)

  • 27/07/2012
    1227. TailCoR (897 KB) Lorenzo Ricci and David Veredas

    We introduce TailCoR, a new measure for tail correlation that is a function of linear and non-linear correlations, the latter characterized by the tail index. TailCoR can be exploited in a number of  financial applications, such as portfolio selection where the investor faces risks of a linear and tail nature. Moreover, it has the following advantages: i) it is exact for any probability level as it is not based on tail asymptotic arguments (contrary to tail dependence coefficients), ii) it can be used in all tail scenarios (fatter, equal to or thinner than those of the Gaussian distribution), iii), it is distribution free, and iv) it is simple and no optimizations are needed. Monte Carlo simulations and calibrations reveal its goodness in finite samples. An empirical illustration using a panel of Euro area sovereign bonds shows that prior to 2009 linear correlations were in the vicinity of one and non-linear correlations were inexistent. Since the beginning of the crisis the linear correlations have decreased sharply, and non-linear correlations appeared and increased signifi cantly in 2010-2011.

  • 04/07/2012
    1226. The effectiveness of forex interventions in four Latin American countries (1 MB) Carmen Broto

    Many central banks actively intervene in the foreign exchange (forex) market, although there is no consensus on its impact on the exchange rate level and volatility. We analyze the effects of daily forex interventions in four Latin American countries with inflation targets -namely, Chile, Colombia, Mexico and Peru -by fitting GARCH-type models. These countries represent a broad span of intervention strategies in terms of size and frequency, ranging from pure discretionality to intervention rules. We also provide new evidence on the presence of asymmetries, which arise if foreign currency purchases and sales have different effects on the exchange rate. We find that first interventions, either isolated or initial in a rule, reduce exchange rate volatility, although their size plays a minor role. Our results support the signaling effect of interventions under infl ation targeting regimes.

  • 03/07/2012
    1225. The cycle of earnings inequality: evidence from Spanish social security data (859 KB) Stéphane Bonhomme and Laura Hospido

    We use detailed information on labor earnings and employment from Social Security records to document earnings inequality in Spain from 1988 to 2010. Male earnings inequality was strongly countercyclical: it increased around the 1993 recession, showed a substantial decrease during the 1997-2007 expansion and then a sharp increase during the recent recession. These developments were partly driven by the cyclicality of employment and earnings in the lower-middle part of the distribution. We emphasize the importance of the housing boom and subsequent housing bust, and show that demand shocks in the construction sector significantly impacted aggregate labor market outcomes.

  • 02/07/2012
    1224. The effects of fiscal shocks on the exchange rate in the EMU and differences with the US (1 MB) Francisco de Castro and Daniel Garrote

    We analyse the impact of government spending shocks on the real effective exchange rate and net exports in the Euro Area within a standard structural VAR framework. We employ a new database that contains quarterly fiscal variables for the Euro Area as a whole. We show that higher government spending leads to real exchange rate appreciation and to a fall in net exports, jointly with lower primary budgetary surpluses, which turns out to be fully consistent with the "twin deficits" hypothesis. The different components of public spending, namely wage and non-wage consumption expenditure, overall public consumption expenditure and public investment, bring about real appreciations. Our results are therefore also consistent both with the home-bias hypothesis of public expenditure and with public investment contributing to generating relative productivity gains in the traded goods sector.
    Contrary to what is observed in the Euro Area, the real effective exchange rate depreciates in the US in response to higher government spending. This discrepancy can ultimately be explained by the reaction of nominal interest rate spreads and the uncovered interest parity condition. The dissimilar reaction of short-term nominal interest rate spreads is attributed to two factors, namely the role of the US dollar as a "safe haven" currency and the countercyclical behaviour of discretionary government spending in the US.

  • 22/06/2012
    1223. Liquidity, term spreads and monetary policy (802 KB) Yunus Aksoy and Henrique S. Basso

    We propose a model that delivers endogenous variations in term spreads driven primarily by banks’ portfolio decision and their appetite to bear the risk of maturity transformation. We first show that fluctuations of the future profitability of banks’ portfolios affect their ability to cover for any liquidity shortage and hence influence the premium they require to carry maturity risk. During a boom, profitability is increasing and thus spreads are low, while during a recession profitability is decreasing and spreads are high, in accordance with the cyclical properties of term spreads in the data. Second, we use the model to look at monetary policy and show that allowing banks to sell long-term assets to the central bank after a liquidity shock leads to a sharp decrease in long-term rates and term spreads. Such interventions have significant impact on long-term investment, decreasing the amplitude of output responses after a liquidity shock. The short-term rate does not need to be decreased as much and inflation turns out to be much higher than if no QE interventions were implemented. Finally, we provide macro and micro-econometric evidence for the U.S. confi rming the importance of expected fi nancial business profi tability in the determination of term spread fluctuations.

  • 14/06/2012
    1222. Bank leverage cycles (1.002 KB) Galo Nuño and Carlos Thomas

    We study the cyclical fluctuations of leverage and assets of financial intermediaries and GDP in the United States. Leverage and assets are several times more volatile than GDP, and experience larger fluctuations for unregulated (‘shadow’) intermediaries than for regulated ones. While the leverage of regulated intermediaries is rather acyclical with respect to their assets and to GDP, the leverage of unregulated intermediaries is strongly procyclical in relation to their assets, and mildly procyclical in relation to GDP. We then build a general equilibrium model with both regulated and unregulated financial intermediaries. The latter borrow from investors in the form of short-term collateralized risky debt, and are subject to endogenous leverage constraints. We find that volatility shocks are key to generating fluctuations and comovements similar to those found in the data. Also, in a scenario with lower cross-sectional volatility, output is higher on average but more volatile, due to higher leverage of unregulated banks.

    Published in: ECB Working Paper N 1524

  • 13/06/2012
    1221. Determinants of corporate default: a BMA approach (591 KB) Carlos González-Aguado and Enrique Moral-Benito

    Model uncertainty hampers consensus on the main determinants of corporate default. We employ Bayesian model averaging (BMA) techniques in order to shed light on this issue. Empirical findings suggest that the most robust determinants of corporate default are firm-specific variables such as the ratio of working capital to total assets, the ratio of retained earnings to total assets, the ratio of total liabilities to total assets and the standard deviation of the firm’s stock return. In contrast, aggregate variables do not seem to play a relevant role once firm-specific characteristics (observable and unobservable) are taken into consideration.

  • 15/06/2012
    1220. Boom-bust cycles, imbalances and discipline in Europe (784 KB) Enrique Alberola, Luis Molina and Pedro del Río

    The fallout from the 2008 financial crisis has been particularly acute in the euro area Member States of the south-western rim and in the new EU Member States, due to their previously accumulated macroeconomic and financial imbalances. The perception that the euro environment provided a solid shield against economic instability shaped the incentives, expectations and actions of agents, markets and policymakers. This, in turn, eroded discipline at all levels: EU-wide surveillance, domestic policies and markets. The empirical analysis of this paper, focused on market discipline, shows that before the crisis credit risk premia neglected fiscal imbalances and hardly reflected external or financial imbalances, in particular in advanced economies. This result is partly explained by the masking effect of the expansionary phase on underlying imbalances. The crisis has shattered the perception of the euro as a safe haven for economic stability, where imbalances do not matter. Moreover, the severity of the crisis has uncovered the fragilities of the institutional framework underpinning the euro and is leading to its reinforcement by means of stronger economic governance and surveillance. Going forward, however, a further two factors may exert a greater impact on the future discipline and stability of the European economies: i) more stringent financing conditions by markets, contingent on fundamentals, although there are doubts on the persistence of this discipline in future expansionary phases; and, above all ii) domestic policymaking conduct that is consistent with the constraints that EMU entails. These three forces could settle the European integration process and EMU on a more solid footing, although the jury is still out.

    Published in: Moneda y Crédito n 234 2012

  • 22/05/2012
    1219. Business cycles and investment in intangibles: evidence from Spanish firms (723 KB) Paloma López-García, José Manuel Montero and Enrique Moral-Benito

    This paper tests the opportunity-cost theory using a panel of Spanish firms during the period 1991-2010. Under this theory, productivity-enhancing activities, such as R&D investment, should increase during downturns because of the fall in their relative cost - in terms of forgone output -. This would imply that business cycles may have a (positive) long-term impact on productivity growth. In the spirit of Aghion et al. (2007) we allow the impact of the cycle on R&D to vary between firms with different access to credit, finding that credit constraints may reverse the countercyclicality of R&D, even if it is optimal for them. We go one step further and explore whether other productivity-enhancing activities, like on-the-job training and the purchase of patents, follow a similar pattern. We find that on-the-job training expenditures are countercyclical and, unlike R&D investment, credit constraints seem not to affect their cyclical behaviour. Investments in other intangibles, such as patent purchases, are found to be acyclical, also irrespective of financial constraints, which could suggest some kind of substitution between R&D and patent purchases over the cycle. Finally, complementarities between the different intangible investments and the traditional productive factors (labour and capital) are also investigated via production function estimates, in order to assess potential indirect effects of the cycle on long-run growth.

  • 27/04/2012
    1218. Effects of equity capital on the interest rate and the demand for credit. Empirical evidence from Spanish (685 KB) Alfredo Martín-Oliver, Sonia Ruano and Vicente Salas-Fumás

    We examine the consequences of imposing higher capital requirements on banks (as under Basel III or, recently, in the case of large banks in the European context) for bank dynamics in complying with the new standards and for the long-term effects on bank lending rates and the demand for bank credit. The analysis combines econometric estimations of the determinants of equity capital ratios and lending rates with simulations of market equilibrium results for loan interest rates and the demand for bank credit, based on a parameterised model of the Spanish banking industry. We find that the gap between the target and the actual capital ratio is reduced by around 40% every year, mainly with retained earnings. We also find that raising the equity capital ratio by one percentage point increases bank lending rates by 4.2 basis points. Finally, the simulation exercise shows that the estimated increase in the cost of funds for banks associated with a one percentage point increase in the equity capital ratio leads to a fall of 0.8% in the total demand for bank credit. These results suggest that the social costs of higher equity capital requirements for banks are expected to be greater in the transition period, when banks are adjusting to the new standards, than in the steady state of the new industry equilibrium, when all banks comply with the new ratio.

  • 20/03/2012
    1217. Net energy analysis in a Ramsey-Hotelling growth model (800 KB) Arturo Macías and Mariano Matilla-García

    This article presents a dynamic growth model with energy as an input in the production function. The available stock of energy resources is ordered by a quality parameter based on energy accounting: the "Energy Return on Energy Invested" (EROI). To our knowledge this is the first paper where EROI fits in a neoclassical growth model (with individual utility maximization and market equilibrium), setting the economic use of "net energy analysis" on firmer theoretical ground. All necessary concepts to link neoclassical economics and EROI are discussed before their use in the model, and a comparative static analysis of the steady states of a simplified version of the model is presented.

  • 12/03/2012
    1215. Household leverage and fiscal multipliers (925 KB) J. Andrés, J. E. Boscá and J. Ferri

    We study the size of fiscal multipliers in response to a government spending shock under different household leverage conditions in a general equilibrium setting with search and matching frictions. We allow for different levels of household indebtedness by changing the intensive margin of borrowing (loan-to-value ratio), as well as the extensive margin, defined as the number of borrowers over total population. The interaction between the consumption decisions of agents with limited access to credit and the process of wage bargaining and vacancy posting delivers two main results: (a) higher initial leverage makes it more likely to find output multipliers higher than one; and (b) a positive government expenditure shock always produces a positive multiplier for vacancies and employment. The latter result is in sharp contrast to models in which some households do not have access to the financial market (RoT consumers), in which the implied labor market responses to fiscal shocks are inconsistent with the empirical evidence. We also fi nd that the impact on GDP of consolidations is lower when consumers have a more limited capacity to borrow, and that increasing government spending in an episode of intense private deleveraging can still generate positive and signifi cant effects on consumption and output, although the fiscal output (employment) multiplier decreases (increases) with the intensity of the credit crunch. In the model with indebted impatient households we also observe that output (employment) multipliers decrease (increase) markedly with the degree of shock persistence and increase with the degree of price stickiness.

  • 02/03/2012
    1214. Consumption partial insurance of Spanish households (685 KB) Jose Maria Casado

    This paper measures how households smooth changes in consumption when incomes are shifted by permanent or transitory shocks at country and regional level. I compute insurance capacity using the Spanish Continuous Family Expenditure Survey skipping the imputation methods used by the previous literature to mitigate the significant lack of income and consumption panel data information. I find some partial insurance for permanent shocks and a downward bias when imputed data are used. There is significant sensitivity for the youngest and primary educated cohorts that becomes more relevant in some regions. I obtain that durable purchases are a source of insurance with respect to transitory shocks and the effect of family income transfers is almost negligible.

    Published in: Empirical Economics, vol. 40(2), pp 471-495, (April 2011)

  • 01/03/2012
    1213. Envy and habits: panel data estimates of interdependent preferences (560 KB) Francisco Alvarez Cuadrado, Jose Maria Casado, Jose Maria Labeaga and Dhanoos Sutthiphisal

    We estimate the importance of preference interdependence from consumption choices. Our
    strategy follows the literature that tests the constraints imposed by optimality in the evolution
    of individual consumption. We derive a Euler equation from a preference specification that
    allows for non-separabilities across households and across time. The introduction of habits
    and envy places additional restrictions on the evolution of the optimal consumption path.
    We use a unique data set that follows a sample of 3,200 households for up to eight
    consecutive quarters to test these restrictions. Our estimates suggest that, if one defines
    utility over consumption services, a large fraction of these services is relative, with one-quarter
    of the weight placed in the consumption of the reference group and more than one-third of
    the weight placed in the agent’s past consumption.

  • 23/02/2012
    1212. The international risk-sharing puzzle is at businesscycle and lower frequency (570 KB) Giancarlo Corsetti, Luca Dedola and Francesca Viani

    We decompose the correlation between relative consumption and the real exchange rate into its dynamic components at different frequencies. Using multivariate spectral analysis techniques we show that, at odds with a high degree of risk-sharing, in most OECD countries the dynamic correlation tends to be quite negative, and significantly so, at frequencies lower than two years -the appropriate frequencies for assessing the performance of international business cycle models. Theoretically, we show that the dynamic correlation over different frequencies predicted by standard open-economy models is the sum of two terms: a term constant across frequencies, which can be negative when uninsurable risk is large; and a term variable across frequencies, which in bond economies is necessarily positive, reflecting the insurance that intertemporal trade provides against forecastable contingencies. Numerical analysis suggests that leading mechanisms proposed by the literature to account for the puzzle are consistent with the evidence across the spectrum.

    Published in: Canadian Journal of Economics, Canadian Economics Association, vol. 45(2), pages 448-471, (May 2012)

  • 22/02/2012
    1211. International reserves and gross capital flows. Dynamics during financial stress (813 KB)

    Published in: Journal of International Money and Finance 60, February 2016, 151-171Opens in a new window

    and in: Federal Reserve Bank of Dallas, Working Paper N 110

    Enrique Alberola, Aitor Erce and José María Serena

    This paper explores the role of international reserves as a stabilizer of international capital flows during periods of global financial stress. In contrast with previous contributions, aimed at explaining net capital flows, we focus on the behavior of gross capital flows. We analyze an extensive cross-country quarterly database using event analyses and standard panel regressions. We document significant heterogeneity in the response of resident investors to financial stress and relate it to a previously undocumented channel through which reserves are useful during financial stress. International reserves facilitate financial disinvestment overseas by residents, offsetting the simultaneous drop in foreign financing.

  • 17/02/2012
    1210. Determinants of default ratios in the segment of loans to households in Spain (1 MB) Roberto Blanco and Ricardo Gimeno

    In this paper we present the estimation results of a dynamic panel data model that explains the dynamic behaviour of default ratios in Spain for loans extended to the household sector. We estimate the models for two alternative definitions of default and for two different loan categories. The dataset consists of a panel of 50 provinces and covers the period 1984-2009. The results of the models show that the dynamic behaviour of the default ratios of loans extended to Spanish households can be reasonably well characterised with the lagged LHS variable, and the contemporaneous and the lagged values of credit growth, the unemployment rate and the interest debt burden. We find that the increase in the unemployment rate was the main driver of the sharp rise in default ratios between 2007 and 2009 in Spain and that the fall in interest rates since the end of 2008 contributed to moderating the upward path of default ratios in 2009. We also find that there is strong evidence of asymmetrical effects of unemployment ratios on default ratios, and differences between banks and savings banks in their sensitivity to the cycle.

  • 14/02/2012
    1209. Is China climbing up the quality ladder? (546 KB) Gabor Pula and Daniel Santabárbara

    There is an ongoing debate in the literature about the quality content of Chinese exports and to what extent China poses a threat to the market positions of advanced economies. While China’s export structure is very similar to that of the advanced world, its export unit values are well below the level of developed economies. Building on the assumption that unit values reflect quality, the prevailing view of the literature is that China exports low quality varieties of the same products as its advanced competitors. This paper challenges this view by relaxing the assumption that unit values reflect quality. We derive the quality of Chinese exports to the European Union by estimating disaggregated demand functions from a discrete choice model. The paper has three major findings. First, China’s share of the European Union market is larger than would be justified only by its low average prices, implying that the quality of Chinese exports is high compared to many competitors. Second, China has gained quality relative to other competitors since 1995, indicating that China is climbing up the quality ladder. Finally, our analysis of the supply side determinants reveals that the relatively high quality of Chinese exports is related to processing trade and the increasing role of global production networks in China.

  • 13/02/2012
    1208. The schooling response to a sustained Increase in low-skill wages: evidence from Spain 1989-2009 (952 KB) Aitor Lacuesta, Sergio Puente and Ernesto Villanueva

    The response of human capital accumulation to changes in the anticipated returns to schooling determines the type of skills supplied to the labor market, the productivity of future cohorts, and the evolution of inequality. Unlike the US, the UK or Germany, Spain has experienced since 1995 a drop in the returns to medium and tertiary education and, with a lag, a drop in schooling attainment of recent cohorts, providing the opportunity to estimate the response of different forms of human capital acquisition to relative increases in low-skill wages. We measure the expected returns to schooling using skill-specific wages bargained in collective agreements at the province-industry level. We argue that those wages are easily observable by youths and relatively insensitive to shifts in the supply of workers. Our preferred estimates suggest that a 10% increase in the ratio of wages of unskilled workers to the wages of mid-skill workers increases the fraction of males completing at most compulsory schooling by between 2 and 5 percentage points. The response is driven by males from less educated parents and comes at the expense of students from the academic high school track rather than the vocational training track.

  • 25/01/2012
    1207. Smoothing shocks and balancing budgets in a currency union (829 KB) James Costain and Beatriz de Blas

    We study simple fiscal rules for stabilizing the government debt level in response to asymmetric demand shocks in a country that belongs to a currency union. We compare debt stabilization through tax rate adjustments with debt stabilization through expenditure changes. While rapid and flexible adjustment of public expenditure might seem institutionally or informationally infeasible, we discuss one concrete way in which this might be implemented: setting salaries of public employees, and social transfers, in an alternative unit of account, and delegating the valuation of this numeraire to an independent fiscal authority.
    Using a sticky-price DSGE matching model of a small open economy in a currency union, we compare the business cycle implications of several different fiscal rules that all achieve the same reduction in the standard deviation of the public debt. In our simulations, compared with rules that adjust tax rates, a rule that stabilizes the budget by adjusting public salaries and transfers reduces fluctuations in consumption, employment, and private and public after-tax real wages, thus bringing the market economy closer to the social planner’s solution.

    Published in: Moneda y Crédito 234, pp. 37 – 91 (2012)

  • 24/01/2012
    1206. The recent slowdown of bank lending in Spain: are supply-side factors relevant? (1 MB) Ignacio Hernando and Ernesto Villanueva

    Using information of the balance sheets of Spanish banks between 1995 and 2009, we estimate the average impact of current and anticipated changes in banks’ capital on firm lending. We isolate the role of credit supply factors using the variation in capital growth associated to the bank-specific historical exposure to real estate development -measured 10 years before the outburst of the financial crisis- and its interaction with the change in housing prices in the provinces where they operate. We further control for the quality of borrowers by using industry fixed effects. Our main results suggest firstly that lagged exposure to real estate development and its interaction with prices explain banks’ capital growth and the overall doubtful loans ratio after 2008 - in turn, a determinant of anticipated changes in capital. And, secondly, that the deterioration of banks’ capital position has had a negative, although of a limited magnitude, effect on the supply of loans to non-construction firms. Our interpretation is that banks that have experienced capital shortfalls or banks that have increased their capital but without reaching the level that is demanded by financial markets might have had no option but to reduce their lending. The relatively small magnitude of credit supply factors may be explained by the weakness of loan demand in a context of a deep recession.

  • 10/02/2012
    1205. Markov-switching dynamic factor models in real time (768 KB) Maximo Camacho, Gabriel Perez-Quiros and Pilar Poncela

    We extend the Markov-switching dynamic factor model to account for some of the specificities of the day-to-day monitoring of economic developments from macroeconomic indicators, such as ragged edges and mixed frequencies. We examine the theoretical benefits of this extension and corroborate the results through several Monte Carlo simulations. Finally, we assess its empirical reliability to compute real-time inferences of the US business cycle.

  • 09/02/2012
    1204. Finite sample performance of small versus large scale dynamic factor models (649 KB) Rocio Alvarez, Maximo Camacho and Gabriel Perez-Quiros

    We examine the finite-sample performance of small versus large scale dynamic factor models. Our Monte Carlo analysis reveals that small scale factor models out-perform large scale models in factor estimation and forecasting for high levels of cross-correlation across the idiosyncratic errors of series belonging to the same category, for oversampled categories and, especially, for high persistence in either the common factor series or the idiosyncratic errors. Using a panel of 147 US economic indicators, which are classified into 13 economic categories, we show that a small scale dynamic factor model that uses one representative indicator of each category yields satisfactory or even better forecasting results than a large scale dynamic factor model that uses all the economic indicators.

  • 07/02/2012
    1203. Short-run forecasting of the euro-dollar exchange rate with economic fundamentals (659 KB) Marcos dal Bianco, Maximo Camacho and Gabriel Perez-Quiros

    We propose a fundamentals-based econometric model for the weekly changes in the euro-dollar rate with the distinctive feature of mixing economic variables quoted at different frequencies. The model obtains good in-sample fit and, more importantly, encouraging out-of-sample forecasting results at horizons ranging from one week to one month. Specifi cally, we obtain statistically significant improvements upon the hard-to-beat random walk model using traditional statistical measures of forecasting error at all horizons. Moreover, our model improves greatly when we use the direction-of-change metric, which has more economic relevance than other loss measures. With this measure, our model performs much better at all forecasting horizons than a naive model that predicts the exchange rate has an equal chance to go up or down, with statistically signifi cant improvements.

  • 07/02/2012
    1202. Extracting non-linear signals from several economic indicators (720 KB) Maximo Camacho, Gabriel Perez-Quiros and Pilar Poncela

    We develop a twofold analysis of how the information provided by several economic indicators can be used in Markov-switching dynamic factor models to identify the business cycle turning points. First, we compare the performance of a fully non-linear multivariate specification (one-step approach) with the "shortcut" of using a linear factor model to obtain a coincident indicator which is then used to compute the Markov-switching probabilities (two-step approach). Second, we examine the role of increasing the number of indicators. Our results suggest that one step is generally preferred to two steps, although its marginal gains diminish as the quality of the indicators increases and as more indicators are used to identify the non-linear signal. Using the four constituent series of the Stock-Watson coincident index, we illustrate these results for US data.

  • 12/01/2012
    1201. Regulatory bias in the price structure of local telephone services (887 KB) Carlos Pérez Montes

    This article combines a discrete choice model of demand for residential local telephone access and an optimal price regulation model to estimate the welfare weights that state regulators place on consumers with different incomes and locations. I find no evidence of a bias towards rural consumers on average, but the relative weight on low income consumers in a geographic area can vary as a function of the proportions of rural and poor population and the political characteristics of the regulator. I also measure the welfare consequences of deviating from total consumer surplus maximization and disconnecting prices from costs.

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