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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  • 30/12/2015
    1540. Policy spillovers and synergies in a monetary union (1 MB) Óscar Arce, Samuel Hurtado and Carlos Thomas

    We provide a general equilibrium framework for analysing the effects of supply- and demandside policies, and the potential synergies between them, in an asymmetric monetary union that faces a liquidity trap and a slow deleveraging process in its “periphery”. We find that the joint implementation of pro-competition structural reforms in the periphery, a fiscal expansion in the “core” and forward guidance about the future path of nominal interest rates produces positive synergies between the three policies: forward guidance reinforces the expansionary effects of country-specific policies, and the latter in turn improve the effectiveness of forward guidance.

  • 30/12/2015
    1539. Understanding the public sector pay gap (574 KB) Maria M. Campos, Domenico Depalo, Evangelia Papapetrou, Javier J. Pérez and Roberto Ramos

    We uncover the short- and long-run structural determinants of the existing cross-country heterogeneity in public-private pay differentials for a broad set of OECD countries. We explore micro data (EU-SILC, 2004-2012) and macro data (1970-2014). Three results stand out. First, when looking at pay gaps based on individual data, more than half of the cross-sectional variation of the sample can be accounted for by the degree of exposure to international competition, and by the size of the public sector labour force and its composition (i.e. the intensity in the provision of pure public goods), while labour market institutions play a very limited role. Second, we find that pay gaps have narrowed significantly during the recent financial crisis; nevertheless, this decrease can be explained by the widespread process of fiscal consolidation rather than by structural factors. Third, we find that in the log-run openness to international trade and improvements in the institutional quality of governments are associated with decreases in the public-private wage gap. Our findings can be rationalised by a body of research stressing non-competitive wage settlements in the public sector.

  • 30/12/2015
    1538. Prudential filters, portfolio composition and capital ratios in European banks (799 KB) Isabel Argimón, Michel Dietsch and Ángel Estrada

    European banks hold 10% of their total assets in portfolios that give rise to unrealised gains and losses which under Basel III will no longer be allowed to be removed from banks’ regulatory capital. Using a sample of European banks, and taking advantage of the different treatment afforded, under Basel II, to such gains and losses among jurisdictions and instruments and over time, we find evidence that: a) the inclusion of unrealised gains and losses in capital ratios increases their volatility; b) the partial inclusion of unrealised gains and total inclusion of losses on fixed-income securities in regulatory capital, compared with the complete exclusion of both (neutralisation), reduces the volume of securities categorised as Available For Sale (AFS), thus potentially affecting liquidity management and demand for bonds (most of which are currently government bonds); and c) the higher the partial inclusion of gains from debt instruments, the lower the holdings of such instruments in the AFS category and the higher the regulatory Tier 1 capital ratio, thus affecting banks’ capital buffer strategy. We do not find evidence that the removal of neutralisation would impact capital ratios.

  • 07/12/2015
    1537. The influence of risk-taking on bank efficiency: evidence from Colombia (573 KB) Miguel Sarmiento and Jorge E. Galán

    This paper presents a stochastic frontier model with random inefficiency parameters which captures the influence of risk-taking on bank efficiency and distinguishes the effects among banks with different characteristics. The model is fitted to a 10-year sample of Colombian banks. Cost and profit efficiency are found to be over and underestimated, respectively, when risk measures are omitted or are not accurately modelled. Moreover, the magnitudes at which similar levels of risk affect bank efficiency vary with size and affiliation. In particular, domestic and small Colombian banks benefit more from being highly capitalised, while large and foreign banks benefit from higher exposure to credit and market risk. Holding more liquid assets is found to affect efficiency only at domestic banks. Lastly, we identify some channels that can explain these differences and provide insights for prudential regulation.

  • 04/12/2015
    1536. Heterogeneity of markups at the firm level and changes during the Great Recession: the case of Spain (768 KB) Cristina Fernández, Aitor Lacuesta, José Manuel Montero and Alberto Urtasun

    We broaden the conceptual framework of estimating markups at the sectoral level developed by Roeger (1995), and extended by Crépon et al. (2005) with labour market imperfections, to account for firm-level heterogeneity derived from differences in productivity. We estimate this model with a comprehensive panel of Spanish non-financial corporations for the period 2001-2007 to find that perfect competition is widely rejected in the data. More interestingly, within each sector, firms with higher productivity present higher markups. Further, we use this empirical setting to estimate changes in firm-level markups over the course of the crisis (2008/2012). Our results indicate that for around 50% of sectors average markups increased, following a decrease in the number of firms, while for around 35% of industries the relevance of within-sector markup heterogeneity decreased at the same time that the variance of within-sector TFP increased. This last result suggests that the simple changes in the number and composition of competing firms cannot explain within-sector markups and we require additional factors to account for recent developments. For instance, we provide evidence that both an increase in consumer product substitutability and in fixed entry costs during the crisis might be a good explanation.

  • 27/11/2015
    1535. Measuring expectations from household surveys: new results on subjective probabilities of future house prices (1.006 KB) Olympia Bover

    I analyse new data on subjective probabilistic expectations on house prices collected in the Spanish Survey of Household Finances. Households are asked to distribute ten points among five different scenarios for the change in the price of their homes over the next 12 months. This paper is the first empirical study to document the beliefs of a representative sample of households about the future value of their homes. It also reviews the methodology of expectation measurement and recent work on household subjective probabilities. I model individual subjective probability densities using splines, construct quantiles from those densities, and analyse how the heterogeneity in the individual distributions relates to differences in housing and household characteristics. An important result of the paper is that women are more optimistic about the evolution of house prices than men. Location at the postal code level accounts for a large fraction of the variation in the subjective distributions across households. Finally, I provide some results on how subjective expectations matter for predicting spending behaviour. Housing investment and car purchases are negatively associated with pessimistic expectations about future house price changes and with uncertainty about those expectations.

  • 25/11/2015
    1534. The unbearable divergence of unemployment in Europe (2 MB)

    Published in: ECB Forum on Central Banking, May 2015

    Tito Boeri and Juan F. Jimeno

    Unemployment in Europe is not only “too high”, it is also too different across countries that belong to a monetary union. In this paper we i) document this increasing heterogeneity, ii) try to explain it and iii) draw from our diagnosis indications as to the appropriate set of policies to reduce unemployment and labour market disparities. Our analysis suggests that the divergence in labour market outcomes across Europe is the by-product of interactions between, on the one hand, shocks of varying size and nature, and, on the other hand, country-specific labour market institutions. We argue that EU policy coordination and conditionality during the Great Recession and the euro area debt crisis did not properly take into account these interactions. We also propose a change in the European policy approach for fighting unemployment.

  • 20/11/2015
    1533. Controlling a distribution of heterogeneous agents (962 KB) Galo Nuño and Benjamin Moll

    This paper analyzes the problem of a benevolent planner wishing to control a population of heterogeneous agents subject to idiosyncratic shocks. This is equivalent to a deterministic control problem in which the state variable is the cross-sectional distribution. We show how, in continuous time, this problem can be broken down into a dynamic programming equation plus the law of motion of the distribution, and we introduce a new numerical algorithm to solve it. As an application, we analyze the constrained-efficient allocation of an Aiyagari economy with a fat-tailed wealth distribution. We find that the constrained-efficient allocation features more wealth inequality than the competitive equilibrium.

  • 19/11/2015
    1532. Disagreement about inflation and the yield curve (1 MB) Paul Ehling, Michael Gallmeyer, Christian Heyerdahl-Larsen and Philipp Illeditsch

    We show theoretically that inflation disagreement drives a wedge between real and nominal yields and raises their levels and volatilities. We demonstrate empirically that an inflation disagreement increase of one standard deviation raises real and nominal yields and their volatilities, break-even inflation, and the inflation risk premium by at least 30% of their respective standard deviations. Inflation disagreement is positively related to consumers’ cross-sectional consumption growth volatility and trading in bonds, interest rate futures, and inflation swaps. Calibrating the model to disagreement, inflation, and yield data reproduces the economically significant impact of inflation disagreement on real and nominal yield curves.

  • 16/11/2015
    1531. Institutional drivers of capital flows (784 KB) Irma Alonso Álvarez

    This paper empirically analyzes the role of institutional factors in shaping the dynamics of gross capital flows. We build an institutional quality index and test its relevance for both gross capital inflows and outflows using a panel of 56 countries, differentiating between high-income and low-income economies, over the period 1996-2012. We find that institutional quality is a significant factor affecting the behavior of both foreign and domestic investors. Countries with better governance and public sector credibility tend to attract more flows. Causality is confirmed through IV estimates for a sub-sample of 25 countries. In addition, we show that some governance features matter more than others. Specifically, the most relevant institutional indicators are Government Effectiveness and Regulatory Quality, which capture the government’s ability to implement adequate, sound and credible policies. Finally, we assess the role of institutional quality during periods of financial stress. The analysis suggests that domestic investors in countries with a sound institutional framework tend to retrench more capital, mitigating the negative effects of declining gross capital inflows. Therefore, sound institutions incentivize the build-up of external assets in high-income countries by promoting larger outflows in normal times. They also facilitate the repatriation of such assets during crises.

  • 13/11/2015
    1530. The impact of the euro on euro area GDP per capita (808 KB) Cristina Fernández and Pilar García Perea

    This paper poses the following question: what would euro area GDP per capita have been, had the  onetary union not been launched? To this end we use the synthetic control methodology. We find that the euro did not bring the expected jump to a permanent higher growth path. During the early years of the monetary union, aggregate GDP per capita in the euro area rose slightly above the path predicted by its counterfactual; but since the mid- 2000s, these gains have been completely eroded. Central European countries – Germany, the Netherlands and Austria – did not seem to obtain any gains or losses from the adoption of the euro. Ireland, Spain and Greece registered positive and significant gains, but only during the expansionary years that followed the launch of the euro, while Italy and Portugal quickly lagged behind the GDP per capita predicted by their counterfactual. We test the robustness of the synthetic estimation not only to the exclusion of any particular country from the donor pool but also to the omission of each of the selected determinants of GDP per capita and to the reduction of the dimensions in the optimisation programme, namely the number of GDP determinants.

  • 28/10/2015
    1529. Worker flows in the European Union during the Great Recession (1 MB) José María Casado, Cristina Fernández and Juan F. Jimeno

    We firstly measure the contribution of worker flows across employment, unemployment, and non-participation to the change in unemployment in eleven EU countries during the period 2006-2012, paying special attention to which socio-demographic groups in each of the countries were most affected by job creation and job destruction during the crisis. We find that age, to a greater extent than educational attainment, is the main determinant of flows from employment into unemployment, particularly in those countries where unemployment increased most. Secondly, we highlight some institutional features of the labour market (employment protection legislation, unemployment insurance and the incidence of active labour market policies) that help explain the cross-country differences in flows between employment and unemployment and in their socio-demographic composition. Finally, we examine whether the crisis has led to some employment reallocation across sectors, finding that, so far, there is no clear evidence in favour of cleansing effects.

  • 05/10/2015
    1528. Demographic structure and macroeconomic trends (870 KB) Yunus Aksoy, Henrique S. Basso, Ron P. Smith and Tobias Grasl

    The effect of changes in demographic structure on medium-run trends of key macroeconomic variables is estimated using a panel VAR of 21 OECD economies. The panel data variability assists the identication of direct effects of demographics, while the dynamic structure uncovers long-term effects. Young and old dependants are found to have a negative impact while workers contribute positively. We propose a theoretical model, highlighting the relationship between demographics, innovation and growth, whose simulations match our empirical findings. The current trend of population aging and reduced fertility is found to reduce output growth and real interest rates across OECD countries.

  • 02/10/2015
    1527. The Great Moderation in historical perspective. Is it that great? (937 KB) María Dolores Gadea, Ana Gómez-Loscos and Gabriel Perez-Quiros

    The Great Moderation (GM) is widely documented in the literature as one of the most important changes in the US business cycle. All the papers that analyze it use post-WWII data. In this paper, we set the GM for the first time against a long-dated historical backdrop, stretching back a century and a half, which includes secular changes in the economic structure and a substantial reduction of output volatility. We find two robust structural breaks in volatility at the end of WWII and in the mid-eighties, showing that the GM still holds in the longer perspective. Furthermore, we show that GM volatility reduction is only linked to expansion features. We also date the US business cycle in the long run, finding that volatility plays a primary role in the definition of the business cycle, which has important consequences for econometricians and forecasters.

  • 24/09/2015
    1526. Securitization and asset prices (798 KB) Yunus Aksoy and Henrique S. Basso

    We investigate the link between securitization and asset prices and show that increases in the growth rate of the volume of ABS issuance lead to a sizable decline in bond and equity premia. Furthermore, we show that in a model where banks select their portfolio of assets and create synthetic securities, the compensation for undertaking risk decreases as securitization increases. The pooling and tranching of credit assets relaxes both the funding and the risk constraints banks face allowing them to increase balance sheet holdings. Accordingly, the drop in risk premium may be unrelated to a decline in actual risk.

  • 22/09/2015
    1525. Fast ML estimation of dynamic bifactor models: an application to European inflation (1 MB) Gabriele Fiorentini, Alessandro Galesi and Enrique Sentana

    We generalise the spectral EM algorithm for dynamic factor models in Fiorentini, Galesi and Sentana (2014) to bifactor models with pervasive global factors complemented by regional ones. We exploit the sparsity of the loading matrices so that researchers can estimate those models by maximum likelihood with numerous series from multiple regions. We also derive convenient expressions for the spectral scores and information matrix, which allows us to switch to the scoring algorithm near the optimum. We explore the ability of a model with one global factor and three regional factors to capture inflation dynamics across 25 European countries in the period 1999-2014.

  • 16/09/2015
    1524. What drives bank-intermediated trade finance? Evidence from cross-country analysis (714 KB) José María Serena Garralda and Garima Vasishtha

    Empirical work on the underlying causes of the recent dislocations in bank-intermediated trade finance has been limited by the scant availability of hard data. This paper aims to analyse the key determinants of bank-intermediated trade finance using a novel dataset covering ten banking jurisdictions. It focuses on the role of global factors as well as country-specific characteristics in driving trade finance. Results indicate that country-specific variables, such as growth in trade flows and funds available for domestic banks, as  well as global financial conditions and global import growth, are important determinants of trade finance. These results are robust to different model specifications. Further, we do not find that trade finance is more sensitive to global financial conditions than other loans to non-bank entities.

  • 15/09/2015
    1523. Country shocks, monetary policy expectations and ECB decisions. A dynamic non-linear approach (811 KB) Maximo Camacho, Danilo Leiva-Leon and Gabriel Perez-Quiros

    Previous studies have shown that the effectiveness of monetary policy largely depends on market expectations about future policy actions. This paper proposes an econometric framework to address the effect of the current state of the economy on monetary policy expectations. Specifically, we study the effect of contractionary (or expansionary) demand (or supply) shocks hitting the euro area countries on the expectations about the ECB’s monetary policy in two stages. In the first stage, we construct indices of real activity and inflation dynamics for each country, based on soft and hard indicators. In the second stage, we use those indices to provide assessments of the type of aggregate shock hitting each country and assess its effect on monetary policy expectations at different horizons. Our results indicate that expectations are responsive to aggregate contractionary shocks, but not to expansionary shocks. In particular, contractionary demand shocks have a negative effect on short-term monetary policy expectations, while contractionary supply shocks have a negative effect on medium and long-term expectations. Moreover, shocks to different economies do not have significantly different effects on expectations, although some crosscountry differences arise.

  • 07/08/2015
    1522. Long-lasting consequences of the European crisis (1 MB) Juan F. Jimeno

    The Great Recession and the subsequent European crisis may have long-lasting effects on aggregate demand, aggregate supply and, hence, on macroeconomic performance over the medium and long run. Besides the fact that financial crises last longer and are succeeded by slower recoveries, and apart from the hysteresis effects that may operate after episodes of long-term unemployment, the combination of high (public and private) debt and low population and productivity growth may create significant constraints for monetary and fiscal policies. In this paper I develop an OLG model, one earlier used by Eggertsson and Mehrotra (2014) to rationalise the «secular stagnation hypothesis», to show how high debt and low population and productivity growth may condition the macroeconomic performance of some European countries over the medium and long run.

  • 24/07/2015
    1521. Changes in funding patterns by Latin American banking systems: how large? how risky? (945 KB) Liliana Rojas-Suárez and José María Serena

    This paper investigates the shifts in Latin American banks’ funding patterns in the postglobal financial crisis period. To this end we introduce a new measure of exposure of local banking systems to international debt markets that we term: International Debt Issuances by Locally Supervised Institutions. In contrast to well-known BIS measures, our new metric includes all entities that fall under the supervisory purview of the local authority. This is especially important in Latin America, where the participation of foreign banks that are established as independent, fully-capitalized entities is most substantial. Using this metric we found that all types of Latin American banking groups increased significantly and sharply their issuance of external debt securities. Owing to the low ratios of banks’ external debt to total liabilities in the pre-crisis period, solid solvency ratios and improved supervisory capacity, the recent increase in banks’ external indebtedness has not resulted in financial difficulties and banking systems remain strong. However, a preliminary analysis of risks based on this new trend reveals the emergence of several signs of increased vulnerability. First, in some banking groups (particularly in Brazilian banks, domestic and foreign alike) the increased issuance of external debt has been accompanied by a greater reliance on wholesale funding. In contrast, reliance on wholesale funding by Colombian banks has remained low and stable. Second, rollover risks have significantly increased for Latin American banking groups. Maturing debt, which increased significantly in 2013-14, will continue at high levels in 2015-16 in the context of major uncertainties in international capital markets. This risk is especially noticeable in Brazil and Chile, whose ratios of maturing debt to total debt are high. Third, in spite of a sizeable accumulation of international reserves, the large increase in banks’ external debt might have contributed to reducing the resilience of central banks to deal with a severe adverse shock.

  • 20/07/2015
    1520. Higher-order risk preferences, constant relative risk aversion and the optimal portfolio allocation (598 KB) Trino-Manuel Ñíguez, Ivan Paya, David Peel and Javier Perote

    We derive the conditions for the optimal portfolio choice within a constant relative risk aversion type of utility function considering alternative probability distributions that are able to capture the asymmetric and leptokurtic features of asset returns. We illustrate the role —beyond risk aversion— played by higher-order moments in the optimal decision to form a portfolio of risky assets. In particular, we show that higher-order risk attitudes such as prudence and temperance associated with the third and fourth moments of the distribution define different optimal portfolios than those constrained under risk aversion.

  • 16/07/2015
    1519. Patent collateral, investor commitment and the market for venture lending (913 KB) Yael V. Hochberg, Carlos J. Serrano and Rosemarie H. Ziedonis

    This paper investigates the market for lending to technology startups (i.e. venture lending) and examines two mechanisms that facilitate trade within it: the ’saleability’ of patent collateral and financial intermediaries. We find that intensified trading in the secondary market for patent assets increases the annual rate of startup lending, particularly for startups with more re-deployable patent assets. Moreover, we show that the credibility of venture capitalist commitments to refinance and grow fl edgling companies is vital for startup debt provision. Following a severe and unexpected capital supply shock for VCs, we find a striking flight to safety among lenders, who continue to finance startups whose investors are better able to credibly commit to refinancing their portfolio companies, but withdraw from otherwise promising projects that may have most needed their funds. The findings are consistent with predictions of incomplete contracting and financial intermediation theory.

  • 24/06/2015
    1518. Quantitative effects of the shale oil revolution (602 KB) Cristiana Belu Manescu and Galo Nuño

    The aim of this paper is to analyse the impact of the so-called «shale oil revolution» on oil prices and economic growth. We employ a general equilibrium model of the world oil market in which Saudi Arabia is the dominant firm, with the rest of the producers as a competitive fringe. Our results suggest that most of the expected increase in US oil supply due to the shale oil revolution has already been incorporated into prices and that it will produce an additional increase of 0.2 percent in the GDP of oil importers in the period 2010-2018. We also employ the model to analyse the collapse in oil prices in the second half of 2014 and conclude that it was mainly due to positive unanticipated supply shocks.

  • 24/06/2015
    1517. Monetary policy and sovereign debt vulnerability (Revised version: September 2015) (855 KB) Galo Nuño and Carlos Thomas

    We investigate the trade-offs between price stability and the sustainability of sovereign debt, using a small open economy model where the government issues nominal defaultable debt and chooses fiscal and monetary policy under discretion. When choosing inflation, the government trades off the reduction in the real value of debt -which makes it more sustainable- against the welfare costs of inflation. We compare this scenario with one in which the government gives up the ability to deflate debt away, e.g. by issuing foreign currency debt or joining a monetary union with an anti-inflationary stance. We find that the benefits of abandoning debt deflation outweigh the costs, even when the economy is close to default. Crucially, the increase in inflation expectations and hence in nominal yields produced by discretionary monetary policy largely undoes the debt deflation effect.

  • 22/06/2015
    1516. On the predictability of narrative fiscal adjustments (433 KB) Pablo Hernández de Cos and Enrique Moral-Benito

    In an influential paper, Devries et al. (2011) construct narrative series of tax- and spending-based fiscal adjustments for a panel of OECD countries. In this paper, we find that the adjustments based on spending cuts can be predicted on the basis of past output growth and other macroeconomic variables. Moreover, we illustrate that this source of endogeneity may generate significant differences in the estimated multipliers.

  • 19/06/2015
    1515. Fiscal consolidation after the Great Recession: the role of composition (735 KB) Iván Kataryniuk and Javier Vallés

    We have examined the fiscal consolidation episodes in a group of OECD countries from 2009 to 2014. The range of the estimated short-term fiscal multiplier runs from 1.2% to 2% of GDP, larger than those obtained in more “normal times”, implying that the contractionary effect has been greater in depressed environments. Nevertheless, we have also found that revenue measures have a higher and more persistent real impact than expenditure measures, which is more consistent with the literature and suggests that expenditure cuts are less harmful for the economy than tax hikes.

  • 12/06/2015
    1514. Default near-the-default-point: the value of and the distance to default (769 KB) Alfredo Ibáñez

    We show that the default event defined by endogenous credit-risk models (i.e. low asset values) can likewise be described in terms of low equity prices and negative net cashfl ows (high debt service and/or negative earnings). Specifically, distance-to-default (DD), a volatility-adjusted measure of leverage, is given by the ratio of equity prices to negative net cash flows. This implies that the probability of default is the probability of this ratio becoming small, which then depends on the path of these two variables. This helps to explain why just equity prices (price per share, past return, and volatility) and firm’s debt and profitability are significant in reduced-form models that predict default while Merton’s DD becomes redundant if we control for them [Campbell et al. (2008)]. In endogenous models, default is triggered by depressed equity prices and a negative flow to shareholders (rather than low asset value). And, inversely, default concerns are readily lessened by easing refi nancing costs (e.g. sovereigns for which default is costly and which regularly roll over their debts), lowering the principal (underwater mortgages or subprime consumer loans, which increases equity value), or raising equity (troubled banks).

  • 02/06/2015
    1513. Networks and the dynamics of firms’ export portfolio (897 KB) Juan de Lucio, Raúl Mínguez, Asier Minondo and Francisco Requena

    We use network-analysis tools to identify communities in the web of exporters' destinations. Our network-based community measure is purely outcome-based; it captures multilateral rather than bilateral dependence across countries; and it can be calculated at the industry level. We next use our network-based community measure as a predictor of additional countries chosen by firms expanding their export destinations portfolios. Using data on new Mexican exporters, the probability of choosing a new export destination doubles if it belongs to the same community of any of the firm’s previous destinations. The introduction of the network-based community variable improves the accuracy of the model by up to 19% relative to a model that only includes gravity variables. Industry-specific communities and general communities play similar roles in determining the dynamics of Mexican exporters' country portfolios.

  • 16/04/2015
    1512. The bank lending channel of unconventional monetary policy: the impact of the VLTROs on credit supply in Spain (747 KB) Miguel García-Posada and Marcos Marchetti

    We assess the impact on the credit supply to non-financial corporations of the two verylong- term refinancing operations (VLTROs) conducted by the Eurosystem in December 2011 and February 2012 for the case of Spain. To do so we use bank-firm level information from a sample of more than one million lending relationships over two years. Our methodology tackles the two main identification challenges: (i) how to disentangle credit supply from demand; and (ii) the endogeneity of VLTRO bids, as banks with more deteriorated funding conditions were more likely both to ask for a large amount of funds and to restrict credit supply. First, we exploit the fact that many firms simultaneously borrow from several banks to effectively control for firm-specific credit demand. Second, we exhaustively control for banks’ funding difficulties by constructing several measures of balance-sheet strength and by including bank fixed effects. Our findings suggest that the VLTROs had a positive moderately-sized effect on the supply of bank credit to firms, providing evidence of a bank lending channel in the context of unconventional monetary policy. We also find that the effect was greater for illiquid banks and that it was driven by credit to SMEs, as there was no impact on loans to large firms.

  • 14/04/2015
    1511. Financial innovation in sovereign borrowing and public provision of liquidity (782 KB) Patricia Gómez-González

    This paper studies how financial innovation in sovereign debt markets can increase a country’s level of private investment and welfare. I propose a model where public debt has a liquidity purpose for the domestic private sector and is demanded as a saving vehicle by more patient international investors. The public bond is risky, it has a low (high) return when the government’s fiscal capacity is low (high), but the government cannot strategically default on it. The main result of the paper is that the government can increase private investment by increasing the number of assets supplied, tranching its fiscal capacity, and issuing a safe and a risky bond. The risky bond is held only by international investors and the domestic private sector demands the safe bonds. Safe bonds lower the cost of liquidity hoarding for the private sector which enables it to increase investment. I test the predictions of the model using a dataset on public debt and local currency sovereign debt ownership for a group of emerging economies. I find that domestic collateral constraints are key determinants of the shares held abroad of total public debt and especially of relatively riskier debt instruments (local currency debt).

  • 13/04/2015
    1510. Volatility-related exchange traded assets: an econometric investigation (783 KB) Javier Mencía and Enrique Sentana

    We compare semi-nonparametric expansions of the Gamma distribution with alternative Laguerre expansions, showing that they substantially widen the range of feasible moments of positive random variables. Then we combine those expansions with a component version of the Multiplicative Error Model to capture the mean reversion typical in positive but stationary financial time series. Finally, we carry out an empirical application in which we compare various asset allocation strategies for Exchange Traded Notes tracking VIX futures indices, which are increasingly popular but risky financial instruments. We show the superior performance of the strategies based on our econometric model.

  • 30/03/2015
    1509. Monitoring the world business cycle (576 KB) Maximo Camacho and Jaime Martinez-Martin

    We propose a Markov-switching dynamic factor model to construct an index of global business cycle conditions, for performing short-term forecasts of quarterly world GDP growth in real time and computing real-time business cycle probabilities. To overcome the real-time forecasting challenges, the model takes into account mixed frequencies, asynchronous data publication and leading indicators. Our pseudo real-time results show that this approach provides reliable and timely inferences of quarterly world growth and of the state of the world business cycle on a monthly basis.

  • 24/03/2015
    1508. Fiscal targets. A guide to forecasters? (709 KB) Joan Paredes, Javier J. Pérez and Gabriel Perez-Quirós

    Should rational agents take into consideration government policy announcements? A skilled agent (an econometrician) could set up a model to combine the following two pieces of information in order to anticipate the future course of fiscal policy in real-time: (i) the ex-ante path of policy as published/announced by the government; (ii) incoming, observed data on the actual degree of implementation of ongoing plans. We formulate and estimate empirical models for a number of EU countries (Germany, France, Italy and Spain) to show that government (consumption) targets convey useful information about ex-post policy developments when policy changes significantly (even if past credibility is low) and when there is limited information about the implementation of plans (e.g. at the beginning of a fiscal year). In addition, our models are instrumental in unveiling the current course of policy in real time. Our approach complements a well-established branch of the literature that finds politically motivated biases in policy targets.

  • 23/03/2015
    1507. Employment protection legislation and labor court activity in Spain (728 KB)

    Published in: IZA Journal of Labor Economics.

    Juan F. Jimeno, Marta Martínez-Matute and Juan S. Mora-Sanguinetti

    Labor courts may introduce a significant wedge between “legal” firing costs and “effective” (post-trial) firing costs. Apart from procedural costs, there is uncertainty over judges’ rulings, in particular over the likelihood of a “fair” dismissal ultimately being ruled as “unfair”, which may increase firing costs significantly. In 2010 and 2012, reforms of Employment Protection Legislation widened the definition of fair economic dismissals in Spain. In this paper we look at Labor Court rulings on dismissals across Spanish provinces before and after the EPL reforms (2004-2014). We make this comparison taking into account a set of co-variates (local labor market conditions, characteristics of the Labor Courts, pre-trial conciliations, congestion of Labor Courts) which may determine the selection of dismissal cases ruled by Labor Courts. Our results suggest that, despite the 2010 and 2012 EPL reforms, the proportion of economic redundancies being ruled as fair by Labor Courts has not substantially increased, although it is now less negatively associated with the local unemployment rate than in the pre-reform period.

  • 16/03/2015
    1506. Securitization and banks’ capital structure (847 KB) Andres Almazan, Alfredo Martín-Oliver and Jesús Saurina

    Asset securitization offers banks the possibility of altering their capital structures and the financial intermediation process. This study shows that the introduction of securitization is associated with fundamental changes in the funding policies of banks. In particular, we present evidence of more intense use of securitization by banks (i) with stronger growth opportunities; (ii) with liquidity constraints; (iii) with costlier alternative sources of funding; and (iv) with restricted access to capital markets owing to adverse selection. Securitization is also observed to be higher on the pecking order of financing choices of small and medium-sized banks and non-listed banks, which are likely to face more severe adverse selection problems.

  • 25/02/2015
    1505. Litigation in Spain 2001-2010: Exploring the market for legal services (1 MB) Juan S. Mora-Sanguinetti and Nuno Garoupa

    There is empirical evidence of a cross-country positive association between the number of lawyers per capita and the extent of litigation. For instance, Spain has more litigation and more lawyers per capita than most OECD countries. How should this association be interpreted? In this paper we analyse the variation in both variables across Spanish provinces during the period 2001-2010, by means of an instrumental variable approach, to shed some light on the sources of the statistical association between them. Finally, implications of the results are discussed.

  • 19/02/2015
    1504. Real wage responsiveness to unemployment in Spain: asymmetries along the business cycle (680 KB) Paulino Font, Mario Izquierdo and Sergio Puente

    We estimate real wage cyclicality in the period between 1987 and 2013 using a large administrative dataset of workers in Spain. Real wages are weakly procyclical in Spain and, focusing on different phases of the business cycle, we find significant differences between expansions and recessions, with even lower real wage cyclicality in recessions. Furthermore, higher levels of unemployment do not translate into additional real wage adjustments when the economy is contracting, while lower levels of unemployment during expansions have incremental effects on wage elasticity. This general result holds after accounting for differences in tenure, type of contract and age. Nevertheless, wages of newly hired workers are the most sensitive to the business cycle and exhibit the lowest asymmetric pattern between expansions and recessions. At the other end of the scale, wages of workers with more than six years’ tenure provide the most protection against economic downturns. The same is true for fixed-term vs. permanent workers and for young vs. older workers.

  • 18/02/2015
    1503. Spain: from immigration to emigration? (1.022 KB) Mario Izquierdo, Juan F. Jimeno and Aitor Lacuesta

    Since the start of the Great Recession the unemployment rate in Spain has risen by almost 18 percentage points. The unemployment crisis is affecting all population groups, including the more highly educated; but it is even more acute for the foreign population, whose unemployment rate is close to 40%. This situation follows a period of very high immigration flows (1995-2007) that set the number of foreigners living in Spain at 11% of the population. This paper documents the characteristics of recent migration flows to Spain and compares how foreign and Spanish nationals are moving abroad and across Spanish regions in response to the unemployment crisis. Building on this comparison, we shed some light on the selection of migrants by educational level and offer conjecture as to the implications of the migration outflows observed in recent years.

  • 03/02/2015
    1502. Finance for all: the impact of financial literacy training in compulsory secondary education in Spain (765 KB) Laura Hospido, Ernesto Villanueva and Gema Zamarro

    We estimate the impact on objective measures of financial literacy of a 10-hour financial education program among 15-year-old students in compulsory secondary schooling. We use a matched sample of students and teachers in Madrid and two different estimation strategies. Firstly, we use reweighting estimators to compare the performance in a test of financial knowledge of students in treatment and control schools. In another specification, we use school fixed-effect estimates of the effect of the course on changes in scores in tests of financial knowledge. The program increased treated students’ financial knowledge by between one-fourth and one-third of a standard deviation. We uncover heterogeneous effects, as students in private schools did not increase their knowledge much, possibly owing to a less intensive implementation of the program. Secondly, we analyze the bias that arises because the set of schools that participate in financial literacy programs is not random. Such selection bias is estimated as the pre-program performance in financial PISA of students in applicant schools relative to a nationally representative sample of schools. We then study whether estimators that condition on school and parental characteristics mitigate selection bias.

  • 16/01/2015
    1501. The Spanish productivity puzzle in the Great Recession (585 KB) Laura Hospido and Eva Moreno-Galbis

    While Spain has traditionally underperformed its European peers in terms of labor productivity, the trend reverses after 2007. The evolution of aggregate productivity in Spain during the Great Recession is shaped largely, albeit not exclusively, by the adverse conditions in the labor market. Using a longitudinal sample of Spanish manufacturing and services companies between 1995 and 2012, we show that the recent increase in Spanish aggregate productivity is also responsive to the behavior of total factor productivity (TFP) and to composition effects. By combining the information at firm level on balance sheet items, collective agreements and imports-exports, we are able to establish that a collective agreement at the firm level and access to external markets are positively related to TFP performance during the whole period. In addition, our estimates indicate that firm TFP was negatively correlated to the proportion of temporary workers during the expansionary period, 1995-2007, whereas the sign of that correlation reversed during the crisis, 2008-2012. Finally, we relate this sign reversal to the changing composition of temporary workers in the labor market.

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