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

All documents are available in PDF format PDF File. Opens in a new window

  • 08/01/2018
    1751. Optimal density forecast combinations (2 MB) Gergely Akos Ganics

    How should researchers combine predictive densities to improve their forecasts? I propose consistent estimators of weights which deliver density forecast combinations approximating the true predictive density, conditional on the researcher’s information set. Monte Carlo simulations confirm that the proposed methods work well for sample sizes of practical interest. In an empirical example of forecasting monthly US industrial production, I demonstrate that the estimator delivers density forecasts which are superior to well-known benchmarks, such as the equal weights scheme. Specifically, I show that housing permits had valuable predictive power before and after the Great Recession. Furthermore, stock returns and corporate bond spreads proved to be useful predictors during the recent crisis, suggesting that financial variables help with density forecasting in a highly leveraged economy.

  • 02/01/2018
    1750. Permissible collateral and access to finance: evidence from a quasi-natural experiment (643 KB) Bing Xu

    By allowing large classes of movable asstes to be used as collateral, the Property Law reform transformed the secured transactions in China. Difference-in-differences test show firms operating with ex-ante more movable assets expand access to bank credit and prolong debt maturity. However, the reform does not seem to improve the efficiency of credit allocation, as debt capacity of ex-ante low quality firms expands the most following the reform. Credit expansion also does not lead to better firm performance. These findings are not driven by confounding factors such as improvements in creditor and property rights protection. Our results also cannot be explained by other important reforms which were introduced around the same time as the introduction of the Property Law. These include anti-tunneling and split-share reforms and amendments to the corporate tax structure in China. We conduct explicit robustness tests for these other reforms and hence contribute to the empirical literature on the reform process in China with new findings.

  • 20/12/2017
    1749. Decentralized multinational banks and risk taking: the Spanish experience in the crisis (792 KB) Isabel Argimón

    This paper analyses the effects of decentralized multinational banks, characterized by the large autonomy of the affiliates that the banking group has abroad, on bank’s risk, using Spanish confidential supervisory data. Having activity abroad, in countries whose business and financial cycles may be less than perfectly correlated with those of the home country can generate more stability in the results of the consolidated banking group. Such isolation should be greater for multinational and decentralized banks. On the other hand, the international activity of banks may be associated to more risk taking as distance can hinder the ability of a bank’s headquarters to monitor its subsidiaries or because of the more limited knowledge of the host country that the group has. Which effect dominates is an empirical matter which could be taken into account in capital requirements and when carrying out stress-tests. We provide empirical evidence of the relevance of the model of entry into foreign markets, international geographic diversification and business co-movements between the Spanish and the host economy on bank’s ex-post risk. The results are consistent with the hypothesis that geographic diversification reduces risk.

  • 20/12/2017
    1748. Markov-switching three-pass regression filter (886 KB) Pierre Guérin, Danilo Leiva-Leon and Massimiliano Marcellino

    We introduce a new approach for the estimation of high-dimensional factor models with regime-switching factor loadings by extending the linear three-pass regression filter to settings where parameters can vary according to Markov processes. The new method, denoted as Markov-switching three-pass regression filter (MS-3PRF), is suitable for data sets with large cross-sectional dimensions, since estimation and inference are straightforward, as opposed to existing regime-switching factor models where computational complexity limits applicability to few variables. In a Monte Carlo experiment, we study the finite sample properties of the MS-3PRF and find that it performs favourably compared with alternative modelling approaches whenever there is structural instability in factor loadings. For empirical applications, we consider forecasting economic activity and bilateral exchange rates, finding that the MS-3PRF approach is competitive in both cases.

  • 01/02/2018
    1747. Credit shocks and the European Labour market (651 KB) Katalin Bodnár, Ludmila Fadejeva, Marco Hoeberichts, Mario Izquierdo Peinado, Christophe Jadeau and Eliana Viviano

    More than five years after the start of the Sovereign debt crisis in Europe, its impact on labour market outcomes is not clear. This paper aims to fill this gap. We use qualitative firm-level data for 24 European countries, collected within the Wage Dynamics Network (WDN) of the ESCB. We first derive a set of indices measuring difficulties in accessing the credit market for the period 2010-13. Second, we provide a description of the relationship between credit difficulties and changes in labour input both along the extensive and the intensive margins as well as on wages. We find strong and significant correlation between credit difficulties and adjustments along both the extensive and the intensive margin. In the presence of credit market difficulties, firms cut wages by reducing the variable part of wages. This evidence suggests that credit shocks can affect not only the real economy, but also nominal variables.

  • 14/12/2017
    1746. Did the bank capital relief induced by the supporting factor enhance SME lending? (725 KB) Sergio Mayordomo and María Rodríguez-Moreno

    The introduction of the SME Supporting Factor (SF) allows banks to reduce capital requirements for credit risk on exposures to SME. This means that banks can free up capital resources that can be redeployed in the form of new loans. Our study documents that the SF alleviates credit rationing for medium-sized firms that are eligible for the application of the SF but not for micro/small firms. These results suggest that European banks were aware of this policy measure and optimized both their regulatory capital and their credit exposures by granting loans to the medium-sized firms, which are safer than micro/small firms.

  • 20/12/2017
    1745. Marriage and health: selection, protection, and assortative mating (1 MB) Nezih Guner, Yuliya Kulikova and Joan Llull

    Using data from the Panel Study of Income Dynamics (PSID) and the Medical Expenditure Panel Survey (MEPS), we analyze the health gap between married and unmarried individuals of working-age. Controlling for observables, we find a gap that peaks at 10 percentage points at ages 55-59 years. The marriage health gap is similar for men and women. If we allow for unobserved heterogeneity in innate health (permanent and age-dependent), potentially correlated with timing and likelihood of marriage, we find that the effect of marriage on health disappears below age 40 years, while about 5 percentage points difference between married and unmarried individuals remains at older ages (55-59 years). This indicates that the observed gap is mainly driven by selection into marriage at younger ages, but there might be a protective effect of marriage at older ages. Exploring the mechanisms behind this result, we find that better innate health is associated with a higher probability of marriage and a lower probability of divorce, and there is strong assortative mating among couples by innate health. We also find that married individuals are more likely to have a healthier behavior compared to unmarried ones. Finally, we find that health insurance is critical for the beneficial effect of marriage.

  • 13/12/2017
    1744. Clustering regional business cycles (624 KB) M.D. Gadea-Rivas, Ana Gómez-Loscos and Eduardo Bandrés

    The aim of this paper is to show the usefulness of Finite Mixture Markov Models (FMMMs) for regional analysis. FMMMs combine clustering techniques and Markov Switching models, providing a powerful methodological framework to jointly obtain business cycle datings and clusters of regions that share similar business cycle characteristics. An illustration with European regional data shows the sound performance of the proposed method.

  • 05/12/2017
    1743. Making room for the needy: the credit-reallocation effects of the ECB’s corporate QE (832 KB) Óscar Arce, Ricardo Gimeno and Sergio Mayordomo

    We analyse how the European Central Bank’s purchases of corporate bonds under its Corporate Sector Purchase Programme (CSPP) affected the financing of Spanish nonfinancial firms. Our results show that the announcement of the CSPP in March 2016 significantly raised firms’ propensity to issue CSPP-eligible bonds. The flipside was a drop in the demand for bank loans by these firms. This drop in the demand for credit by bondissuers, which are usually large corporations, unchained a positive and significant side effect on the flow of new loans extended to – typically smaller – firms that do not issue bonds.
    Specifically, we find that around 78% of the drop in loans previously given to bond issuers was redirected to other companies, which led them to raise investment. This reallocation of credit was amplified by the ECB’s Targeted Longer Term Refinancing Operations (TLTRO).

  • 28/11/2017
    1742. Global imbalances from a stock perspective (1 MB) Enrique Alberola, Ángel Estrada and Francesca Viani

    After the recent crisis, a reduction was observed in global current account (“flow”) imbalances.
    Even so, global disequilibria as measured in terms of countries’ net foreign assets (“stock imbalances”) kept increasing. This paper discusses whether stock imbalances have a stabilising or destabilising impact on countries’ accumulation of external wealth. That is, do creditor economies, by virtue of their positive stock of net foreign assets, keep accumulating–everything else equal— external wealth? Do debtor countries, due to their negative net foreign assets position, keep accumulating external debt? Our results show that in debtor economies the existing stock of net debt helps to limit current account deficits, thus halting future debt accumulation. In creditor countries, however, the positive stock of net foreign assets contributes –everything else equal— to increase future current account surpluses, potentially leading to destabilising dynamics in wealth accumulation. This asymmetry between creditors and debtors holds in spite of the stabilising impact that net foreign assets have on the trade balance of creditor countries through real exchange rate fluctuations, and might have major implications for global trade and growth.

  • 29/11/2017
    1741. Norms in bargaining: evidence from government formation in Spain (1 MB) Thomas Fujiwara and Carlos Sanz

    Theories of multilateral bargaining and coalition formation applied to legislatures predict that
    parties’ seat shares determine their bargaining power. We present findings that are difficult to
    reconcile with this prediction. We use data from 2,898 municipal Spanish elections in which
    two parties tie in the number of seats. The party with slightly more general election votes
    is substantially more likely to appoint the mayor (form the government). Since tied parties
    should, on average, have equal bargaining power, this identifies the effect of being the most
    voted due to a norm prescribing that “the most voted should form government.” The effect
    of being most voted is comparable in size to the effect of obtaining an additional seat. This
    norm binds behavior even when the second and third most voted parties can form a winning
    coalition that prefers the most voted not to appoint the mayor. Voters punish, in future
    elections, second most voted parties that appoint mayors, suggesting that they enforce the
    norm. We document a similar second-versus-third most voted effect and provide suggestive
    evidence of similar norms from 28 national European parliaments. A model where elections
    play a dual role (aggregating information and disciplining incumbents) and different equilibria
    (norms) can occur is consistent with our results and yields additional predictions.

  • 21/11/2017
    1740. Subsidising mature age employment or throwing coins into a wishing well: a quasi-experimental analysis (1 MB) Paulino Font, Mario Izquierdo and Sergio Puente

    This paper evaluates the effect that subsidies to employment maintenance have on the probability of mature age workers staying in the firm. Implementing a quasi-experimental design provided by changes in Spanish labour market regulations, we are able to estimate that subsidy removal had a small though significant impact on the workers’ firm attachment rate. Our results show that a 1 pp increase in the worker’s cost translates into a 0.11 pp increase in the cumulative probability of the worker separating from the firm in the next five months. This effect was mainly driven by workers with relatively less seniority in the firm, who present lower dismissal costs, and by workers in low-skill jobs, for which the wage-productivity gap seems to negatively evolve with age. In terms of cost-benefit analysis, we document that the previous higher rate of job maintenance was achieved at a disproportionate cost, and therefore the elimination of the subsidy resulted in Social Security efficiency gains.

  • 21/11/2017
    1739. Currency unions and heterogeneous trade effects: the case of the Latin Monetary Union (655 KB) Jacopo Timini

    The Latin Monetary Union (LMU) agreement signed in December 1865 by France, Italy, Belgium and Switzerland standardised gold and silver coinage in member countries and allowed free circulation of national coins in the Union. In his seminal study, Flandreau (2000) found no evidence of an overall positive effect of the LMU on trade. In this paper, I estimate the effects of this currency agreement on trade. In my gravity model I explicitly take into account the changing conditions in the international environment that affected the LMU’s underlying economic foundations (i.e. the limits on silver coinage agreed upon in 1874) and its rules (i.e. the “liquidation clause” of 1885). I also test the existence of heterogeneous effects on bilateral trade within the LMU. In line with Flandreau, I find no significant LMU trade effects. However, I find support for the hypothesis that the LMU had significant trade effects for the period 1865-1874. These effects were nonetheless concentrated in trade flows between France and the rest of the LMU members, following a hub-and-spokes structure. Moreover, I find evidence for the existence of an 1874 “LMU-wide” structural break, which affected the course of trade flows within the Union.

  • 31/10/2017
    1738. Cross-border banking on the two sides of the Atlantic: does it have an impact on bank crisis management? (642 KB) María J. Nieto and Larry D. Wall

    In the US and the EU political incentives to oppose cross-border banking have been strong in spite of the measurable benefits to the real economy from breaking down geographic barriers. Even a federal level supervisor and safety net is not by itself sufficient to incentivizing crossborder
    banking although differences in the institutional set up are reflected in the way the two areas responded to the crisis. The US response was a coordinated response and the cost of resolving banks was borne at the national level. Moreover, the FDIC could market failed banks to other banks irrespective of state boundaries reducing the cost of the crisis to the US economy and the sovereign finances. In the EU, the crisis resulted in financial market fragmentation and unbearable costs to some sovereigns.

  • 31/10/2017
    1737. An anatomy of the Spanish current account adjustment: the role of permanent and transitory factors (640 KB)

    Publicado en: SERIEs.Opens in a new window

    Enrique Moral-Benito and Francesca Viani

    This paper aims to identify how much of the recent current account adjustment in Spain can
    be explained by cyclical factors. For this purpose, we consider the cross-country regressions
    in the IMF’s External Balance Assessment (EBA) methodology but allowing for country-specific
    slopes and intercepts. The good fit of these regressions implies negligible residuals for most
    countries, and, as a result, the positive analysis of current account decompositions provides
    a more informative assessment of the external balance drivers. According to our findings,
    around 60% of the 12 pp. adjustment of the Spanish external imbalance over the 2008-2015
    period can be explained by transitory factors such as the output gap, the oil balance, and the
    financial cycle. The remaining 40% is explained by factors such as the cyclically-adjusted fiscal
    consolidation, population aging, lower growth expectations, or competitiveness gains, which
    can all be considered as more permanent phenomena.

  • 30/10/2017
    1736. Changing business models in international bank funding (684 KB) Leonardo Gambacorta, Stefano Schiaffi and Adrian Van Rixtel

    This paper investigates the foreign funding mix of globally active banks. Using BIS international
    banking statistics for a panel of 12 advanced economies, we detect a structural break in international bank funding at the onset of the great financial crisis. In their post-break business model, banks rely less on cross-border liabilities and, instead, tap funds from outside their jurisdictions by making more active use of their subsidiaries and branches, as well as inter-office accounts within the same banking group.

  • 27/10/2017
    1735. Firm heterogeneity and aggregate business services exports: micro evidence from Belgium, France, Germany and Spain (858 KB) Andrea Ariu, Elena Biewen, Sven Blank, Guillaume Gaulier, María Jesús González, Philipp Meinen, Daniel Mirza, César Martín Machuca and Patry Tello

    This paper uses detailed micro data on service exports at the firm-destination-service level to analyse the role of firm heterogeneity in shaping aggregate service exports in Belgium, France,
    Germany and Spain from 2003 to 2007. We decompose the level and the growth of aggregate service exports into different trade margins paying special attention to firm heterogeneity within
    countries. We find that the weak export growth of France is at least partly due to poor performance by small exporters. By contrast, small exporters are the most dynamic contributors to the aggregate exports of Belgium, Germany and Spain. Our results highlight the importance of firm heterogeneity in understanding aggregate export growth.

  • 23/10/2017
    1734. International migration pressures in the long run (838 KB) Rodolfo G. Campos

    Using an empirical gravity model, I estimate the contribution of changes in relative labor supply to bilateral migration in the 2000s and apply the resulting estimates to project future bilateral flows based on population forecasts by the United Nations. I extend the work of Hanson and McIntosh (2016) by including non-OECD destinations and project international migration flows for the whole world. In contrast to their findings, and despite of the slowdown of population growth in Latin America, the US will face sustained immigration pressures because of strong population growth in other regions of the world, leading to a projected immigrant stock that grows for decades to come. For the world as a whole, international migrants are projected to increase from 2.8% of total world population in 2010 to 3.5% in 2050, with a substantial increase of migrants originating from India and Sub-Saharan Africa.

  • 02/10/2017
    1733. External stress early warning indicators (644 KB) César Martín Machuca

    We examine the determinants of external stress episodes through probit analysis, focusing on the role of foreign liabilities in order to build an external crisis early warning indicator for a set of selected EMU countries. We use a panel country data spanning 1970-2011 from External Wealth Dataset (Phillip Lane). Our results show that the ratio of net and gross foreign liabilities to GDP and current account balances — which measure external debt accumulation speed — are significant stress predictors, although (net) FDI liabilities seem an offset factor. Early warning indicators are based on a signalling approach and exploit panel dimension of the data to develop a country specific indicator. We find that EMU peripheral countries’ external indebtedness remains higher than risk threshold, in spite of the external adjustment accumulated in the last years in some countries. This result highlights the necessity of going on structural reforms that reinforce competitiveness of these economies.

  • 27/09/2017
    1732. Leverage and deepening business cycle skewness (1 MB) Henrik Jensen, Ivan Petrella, Søren Hove Ravn and Emiliano Santoro

    We document that the U.S. economy has been characterized by an increasingly negative business cycle asymmetry over the last three decades. This finding can be explained by the concurrent increase in the financial leverage of households and firms. To support this view, we devise and estimate a dynamic general equilibrium model with collateralized borrowing and occasionally binding credit constraints. Higher leverage increases the likelihood that constraints become slack in the face of expansionary shocks, while contractionary shocks are further amplified due to binding constraints. As a result, booms become progressively smoother and more prolonged than busts. We are therefore able to reconcile a more negatively skewed business cycle with the Great Moderation in cyclical volatility. Finally, in line with recent empirical evidence, financially-driven expansions lead to deeper contractions, as compared with equally-sized non-financial expansions.

  • 18/08/2017
    1731. Monetary policy, stock market and sectoral comovement (1 MB) Pierre Guérin and Danilo Leiva-Leon

    This paper evaluates the role that sectoral comovement plays in the propagation of monetary policy shocks on the stock market. In doing so, we introduce a factor-augmented vector autoregressive model with heterogeneous regime-switching factor loadings, denoted as MS2-FAVAR, that allows us to jointly assess (i) potential changes in the degree of comovement between each sector-specific stock return and the aggregate stock market as well as (ii) the propagation of monetary policy shocks taking into account such changes in comovement. We find that the efects of monetary policy shocks on stock returns are substantially amplied when industries experience a stronger degree of comovement, suggesting that a more interconnected stock market is more prone to the propagation of monetary policy shocks. The MS2-FAVAR model is also well-suited to perform a network analysis to characterize linkages in large datasets.

  • 23/08/2017
    1730. Is fiscal policy more effective in uncertain times or during recessions? (976 KB) Mario Alloza

    This paper estimates the impact of government spending shocks on economic activity during periods of high and low uncertainty and during periods of boom and recession. We find that government spending shocks have larger impacts on output in booms than in recessions and larger impacts during tranquil times than during uncertain times. The results suggest that confidence plays an important role in explaining this differential impact.

  • 23/08/2017
    1729. Costly decisions and sequential bargaining (1 MB) James Costain

    This paper models a near-rational agent who chooses from a set of feasible alternatives, subject to a cost function for precise decision-making. Unlike previous papers in the «control costs» tradition, here the cost of decisions is explicitly interpreted in terms of time. That is, by choosing more slowly, the decision-maker can achieve greater accuracy. Moreover, the timing of the choice is itself also treated as a costly decision.

    A trade off between the precision and the speed of choice becomes especially interesting in a strategic situation, where each decision maker must react to the choices of others. Here, the model of costly choice is applied to a sequential bargaining game. The game closely resembles that of Perry and Reny (1993), in which making an offer, or reacting to an offer, requires a positive amount of time. But whereas Perry and Reny treat the decision time as an exogenous fixed cost, here we allow the decision-maker to vary precision by choosing more or less quickly, thus endogenizing the order and timing of offers and responses in the game.

    Numerical simulations of bargaining equilibria closely resemble those of the Binmore, Rubinstein, and Wolinsky (1983) framework, except that the time to reach agreement is nonzero and offers are sometimes rejected. In contrast to the model of Perry and Reny, our numerical results indicate that equilibrium is unique when the space of possible offers is sufficiently finely spaced.

  • 09/08/2017
    1728. The propagation of industrial business cycles (1 MB) Maximo Camacho and Danilo Leiva-Leon

    This paper examines the evolution of the distribution of industry-specific business cycle linkages, which are modelled through a multivariate Markov-switching model and estimated by Gibbs sampling. Using non parametric density estimation approaches, we find that the number and location of modes in the distribution of industrial dissimilarities change over the business cycle. There is a relatively stable trimodal pattern during expansionary and recessionary phases characterized by highly, moderately and lowly synchronized industries. However, during phase changes, the density mass spreads from moderately synchronized industries to lowly synchronized industries. This agrees with a sequential transmission of the industrial business cycle dynamics.

  • 28/07/2017
    1727. Model averaging in Markov-Switching models: predicting national recessions with regional data (466 KB)

    Published in: Economics LettersOpens in a new window

    Pierre Guérin and Danilo Leiva-Leon

    This paper introduces new weighting schemes for model averaging when one is interested in combining discrete forecasts from competing Markov-switching models. In the empirical application, we forecast U.S. business cycle turning points with statelevel employment data. We nd that forecasts obtained with our best combination scheme provide timely updates of U.S. recessions in that they outperform a notoriously dicult benchmark to beat (the anxious index from the Survey of Professional Forecasters) for short-term forecasts.

  • 28/07/2017
    1726. Measuring business cycles intra-synchronization in US: a regime-switching interdependence framework (795 KB) Danilo Leiva-Leon

    This paper proposes a Markov-switching framework to endogenously identify periods where economies are more likely to (i) synchronously enter recessionary and expansionary phases, and (ii) follow independent business cycles. The reliability of the framework is validated with simulated data in Monte Carlo experiments. The framework is applied to assess the timevarying intra-country synchronization in US. The main results report substantial changes over time in the cyclical affiliation patterns of US states, and show that the more similar the economic structures of states, the higher the correlation between their business cycles. A synchronization-based network analysis discloses a change in the propagation pattern of aggregate contractionary shocks across states, suggesting that the US has become more internally synchronized since the early 1990s.

  • 28/07/2017
    1725. The impact of taxes on income mobility (1 MB) Mario Alloza

    This paper investigates how taxes affect relative mobility in the income distribution in the US. Household panel data drawn from the PSID between 1967 and 1996 is employed to analyse the relationship between marginal tax rates and the probability of staying in the same income decile. Exogenous variation in marginal tax rates is identified by using counterfactual rates based on legislated changes in the tax schedule. I find that higher marginal tax rates reduce income mobility. An increase in one percentage point in marginal tax rates causes a decline of around 0.8 percentage points in the probability of changing to a different income decile. Tax reforms that reduce marginal rates by 7 percentage points are estimated to account for around a tenth of the average movements in the income distribution in a year. Additional results suggest that the effect of taxes on income mobility differs according to the level of human capital and that it is particularly significant when considering mobility at the bottom of the distribution.

  • 12/07/2017
    1724. Pricing decisions under financial frictions: evidence from the WDN survey (1 MB) José Manuel Montero

    I test the predictions from Duca, Montero, Riggi and Zizza (2017), who develop a customermarket model with consumer switching costs and capital-market imperfections in which price-cost markups behave countercyclically, with a subsample of European firms participating in the Wage Dynamics Network 2014 survey. I use a novel empirical approach developed by Aakvik, Heckman and Vytlacil (2005) for estimating discrete choice models with binary endogenous regressors that allows for selection on unobservables. Results show that firms subject to financial constraints had a significantly higher probability of raising markups than in a counterfactual scenario without such constraints. Moreover, the estimated partial effects for the main variables are in overall accordance with the predictions from the theoretical model.

  • 07/07/2017
    1723. Dealing with dealers: sovereign CDS comovements (756 KB) Miguel Antón, Sergio Mayordomo and María Rodríguez-Moreno

    We show that sovereign CDS that have common dealers tend to be more correlated, especially when the dealers display similar quoting activity in those contracts over time. This commonality in dealers’ activity is a powerful driver of CDS comovements, over and above fundamental similarities between countries, including default, liquidity, and macro factors. We posit that the mechanism causing the excess correlation is the buying pressure faced by CDS dealers for credit enhancements and regulatory capital reliefs. An instrumental variable analysis confirms that our findings are indeed rooted in a causal relationship.

  • 06/06/2017
    1722. The eurozone (expected) inflation: an option’s eyes view (1 MB) Ricardo Gimeno and Alfredo Ibáñez

    We estimate inflation risk-neutral densities (RNDs) in the Euro area since 2009. We use Euro inflation swaps and caps/floors options, and introduce a simple and parsimonious approach to jointly estimate the RNDs across horizons. This way, we obtain the implicit RND for forward measures, like the five-on-five years inflation rate, which, although it is not directly traded in the market, it is a key rate for monetary policy. Then, we discuss several indicators derived from the information content of the historical RNDs that are useful for monetary policy and compare them in the light of the ECB’s decisions and communication over the last few years. Specically, the evolution of tails risks (associated with deflation and high inflation); the balance of inflation risks; measures of risk aversion from the ECB’s Survey of Professional Forecasters (SPF); and how forward inflation rates react to the ECB’s non-conventional monetary policies (Longer Term Renancing Operations, LTRO, Securities Market Programme, SMP, Asset Purchase Programme, APP, and its variants and extensions).

  • 26/05/2017
    1721. The output effects of tax changes: narrative evidence from Spain (597 KB) Paula Gil, Francisco Martí, Richard Morris, Javier J. Pérez and Roberto Ramos

    This paper estimates the GDP impact of legislated tax changes in Spain using a newly constructed narrative record for the period 1986-2015. Our baseline estimates suggest that a 1% of GDP increase in exogenous taxes depresses output by around 1.3% after one year, this negative effect fading away at more distant horizons. We also find that the effect of changes in indirect taxes are larger and that, following a tax increase, investment reacts more than consumption. Overall, our set of estimates is consistent with negative output effects triggered by tax increases, yet the quantitative effects are subject to non-negligible uncertainty that is refected in wide confidence bands, in line with the extant literature for other countries.

  • 25/05/2017
    1720. A menu on output gap estimation methods (675 KB) Luis J. Álvarez and Ana Gómez-Loscos

    This paper presents a survey of output gap modeling techniques, which are of special interest for policy making institutions. We distinguish between univariate -which estimate trend output on the basis of actual output, without taking into account the information contained in other variables–, and multivariate methods –which incorporate useful information on some other variables, based on economic theory. We present the main advantages and drawbacks of the different methods.

  • 16/05/2017
    1719. On domestic demand and export performance in the euro area countries: does export concentration matter? (535 KB) Paulo Soares Esteves and Elvira Prades

    During economic downturns, weak domestic demand developments seem to be an additional driver of exports, as firms increase their efforts to serve markets abroad to compensate the fall in domestic sales. This may constitute an additional mechanism adjustment for the euro area countries where real exchange rate variations are limited by the common currency itself and the present low inflation environment. However, this substitution effect between domestic and foreign sales could be different across euro area members. This paper uses panel data techniques to assess the role of the export structure in explaining these differences. Building a novel indicator for product concentration, the results suggest that domestic demand developments are more relevant to explain exports in countries with a lower product concentration index (that is, more diversified exports). This contributes to explain why euro area countries under stress registered different economic performance during the most recent years.

  • 12/05/2017
    1718. High growth firms in employment and productivity: dynamic interactions and the role of financial constraints (836 KB) Cristina Guillamón, Enrique Moral-Benito and Sergio Puente

    Using a panel of Spanish firms over the period 2002-2012, we investigate the interactions between high growth episodes in terms of size and productivity. We find that high growth in productivity (size) increases the likelihood of high growth in size (productivity). However, the effect from size to productivity is smaller than the effect from productivity to size. We also explore the potential role of firm-level financial constraints using information from the Central Credit Register (CIR) of Banco de España. Our results indicate that credit constraints hamper high growth episodes in terms of both size and productivity.

  • 05/05/2017
    1717. Exchange rate regime and external adjustment: an empirical investigation for the U.S. (947 KB) Alberto Fuertes

    This paper analyses the relationship between the U.S. net external position and the exchange rate regime. I find a structural break in the U.S. net external position at the end of the Bretton Woods system of fixed exchange rates that changed both the mean and variance of the series. On average, the U.S. changed from a creditor to a debtor position and the variance of the external position increased during the floating period. This increase is to a large extent due to the valuation component of external adjustment, which accounts for 54% of the variance of the U.S. external position during the floating period but only 29% during the fixed exchange rate period. Further analysis shows that the exchange rate regime mainly affects the valuation channel of external adjustment. There is also evidence of another structural break in the U.S. external position around the time of the introduction of the euro. Finally, I document asset pricing implications from the relationship between the exchange rate regime and the external adjustment process, as external imbalances predict future exchange rate developments once the exchange rate regime is taken into account.

  • 27/04/2017
    1716. Immigration and the macroeconomy: some new empirical evidence (1 MB) Francesco Furlanetto and Ørjan Robstad

    We propose a new VAR identification scheme that enables us to disentangle immigration shocks from other macroeconomic shocks. Identification is achieved by imposing sign restrictions on Norwegian data over the period 1990Q1 - 2014Q2. The availability of a quarterly series for net immigration is crucial to achieving identification. Notably, immigration is an endogenous variable in the model and can respond to the state of the economy. We find that domestic labour supply shocks and immigration shocks are well identified and are the dominant driversof immigration dynamics. An exogenous immigration shock lowers unemployment (evenamong native workers), has a small positive effect on prices and on public finances, no impact on house prices and household credit, and a negative effect on productivity.

  • 05/05/2017
    1715. “Keeping it personal” or “getting real”? On the drivers and effectiveness of personal versus real loan guarantees (635 KB) Sergio Mayordomo, Antonio Moreno, Steven Ongena and María Rodríguez-Moreno

    Little is known about the drivers and effectiveness of personal as opposed to real loan guarantees provided by firms. This paper studies a dataset of 477,209 loan contracts granted over the 2006-2014 period by one Spanish financial institution consisting of several distinguishable organisational units. While personal guarantees are mostly driven by the economic environment as reflected in firm and bank conditions, real guarantees are mostly explained by loan characteristics. In response to higher capital requirements imposed by the European authorities in 2011, personal guarantee requirements increased signifi cantly more than their real counterparts. Our results imply that personal guarantees can discipline firms in their risk-taking, but their overuse can limit this positive effect and damage their performance.

  • 11/04/2017
    1714. The impact of firrms’ financial position on fixed investment and employment. An analysis for Spain (643 KB) Fátima Herranz González and Carmen Martínez-Carrascal

    Using a large sample of Spanish companies, this paper investigates the impact that firms’ financial health has on their investment and employment decisions. The results indicate that firms’ financial position is important for explaining firms’ capital expenditures and their employment levels, since cash flow, indebtedness and the debt burden appear to be relevant for explaining investment and employment dynamics. Likewise, the results obtained point to a non-linear impact of financial position on these decisions, this being larger for companies in a less sound financial situation, and suggest that the role of financial factors in explaining investment and employment dynamics is likely to be greater in recessionary periods.

  • 06/04/2017
    1713. Has the Fed responded to house and stock prices? A time-varying analysis (1 MB) Knut Are Aastveit, Francesco Furlanetto and Francesca Loria

    In this paper we use a structural VAR model with time-varying parameters and stochastic volatility to investigate whether the Federal Reserve has responded systematically to asset prices and whether this response has changed over time. To recover the systematic component of monetary policy, we interpret the interest rate equation in the VAR as an extended monetary policy rule responding to inflation, the output gap, house prices and stock prices. We find some time variation in the coefficients for house prices and stock prices but fairly stable coefficients over time for inflation and the output gap. Our results indicate that the systematic component of monetary policy in the US, i) attached a positive weight to real house price growth but lowered it prior to the crisis and eventually raised it again, and ii) only episodically took real stock price growth into account.

  • 23/03/2017
    1712. Top-down vs. bottom-up? Reconciling the effects of tax and transfer shocks on output (621 KB) Sebastian Gechert, Christoph Paetz and Paloma Villanueva

    Using the bottom-up approach of Romer and Romer (2010), we construct a narrative dataset of net-revenue shocks for Germany by extending the tax shock series of Hayo and Uhl (2014) and coding a shock series for social security contributions, benefits and transfers. We estimate the multiplier effects of shocks to net revenues, taxes, social security contributions, benefits and transfers in a proxy SVAR framework [Mertens and Ravn (2013)] and compare them with the top-down identification [Blanchard and Perotti (2002)]. We find multiplier effects of net-revenue components between 0 and 1 for both approaches. These estimates are comparably low and we investigate the differences.

  • 24/03/2017
    1711. TFP growth and commodity prices in emerging economies (627 KB) Iván Kataryniuk and Jaime Martínez-Martín

    In this paper we aim at empirically testing cross-country impacts of commodity price shocks to aggregate TFP growth for a sample of emerging economies. Under a growth accounting framework, we estimate country-specific TFP growth (1992-2014) and select the attendant robust determinants by means of a Bayesian Model Averaging (BMA) approach. To identify the effects of structural shocks, we propose a Bayesian panel VAR model and calculate cyclically adjusted TFP growth net of demand shocks (i.e. output gap) and commodity prices. Our results suggest that: i) the relationship of commodity prices to TFP growth has been very high in small commodity-exporting economies (i.e. an increase of 10% in commodity prices is associated with a sizable expansion of TFP growth in a year for an average commodity exporter); ii) although our evidence is not sufficient to empirically distinguish among theoretical explanations, our results favour an interpretation that weights short-term effects of commodity prices on productivity, either through transitional dynamics to the manufacturing sector or through mismeasurement of TFP; and iii) cyclically adjusted TFP growth highlights the importance of negative supply shocks in commodity-exporting countries. All in all, much of the increase in TFP growth in the last decade was related to a favourable cyclical environment, a result with potentially significant policy implications for commodity-dependent economies.

  • 28/03/2017
    1710. Fiscal delegation in a monetary union: instrument assignment and stabilization properties (950 KB) Henrique S. Basso and James Costain

    Motivated by the failure of fiscal rules to eliminate deficit bias in the euro area, this paper analyzes an alternative policy regime in which each Member State government delegates at least one fiscal instrument to an independent authority with a mandate to avoid excessive debt. Other fiscal decisions remain in the hands of member governments, including the allocation of spending across different public goods, and the composition of taxation. We study the short-and long-run properties of dynamic games representing different institutional configurations in a monetary union. Delegation of budget balance responsibilities to a national or union-wide fiscal authority implies large long-run welfare gains due to much lower steady-state debt. The presence of the fiscal authority also reduces the welfare cost of fluctuations in the demand for public spending, in spite of the fact that the authority imposes considerable “austerity” when it responds to fiscal shocks.

  • 15/03/2017
    1709. Direct democracy and government size: evidence from Spain (821 KB) Carlos Sanz

    Direct democracy is spreading across the world, but little is known about its effects on policy. I provide evidence from a unique scenario. In Spain, national law determines that municipalities follow either direct or representative democracy, depending on their population. Regression discontinuity estimates indicate that direct democracy leads to smaller government, reducing public spending by around 8%. Public revenue decreases by a similar amount and, therefore, there is no effect on budget deficits. These findings can be explained by a model in which direct democracy allows voters to enforce lower special interest spending.

  • 09/03/2017
    1708. Dissecting US recoveries (534 KB) María Dolores Gadea, Ana Gómez-Loscos and Gabriel Pérez-Quirós

    We propose a set of new quantitative measures to characterise more fully the features of economic recoveries. We apply these measures to post-war US expansions and use cluster analysis to determine that there are two different types of recoveries in recent US economic history, with most expansions before 1984 (Great Moderation) looking quite different from those after.

  • 02/03/2017
    1707. Service regulations, input prices and export volumes: evidence from a panel of manufacturing firms (959 KB) Mónica Correa-López and Rafael Doménech

    Using a panel of firm-level data from Spanish manufacturers, this study shows that better service regulation reduces the price of intermediate inputs paid by downstream firms. The beneficial cost effects of services reforms extend to both large and small-to-medium sized corporations (SMEs), but the former tend to enjoy greater gains. This feature also manifests itself in international markets. We identify an input cost channel through which service regulations affect the volume of exports of large manufacturers, while the evidence of such channel is weaker for SMEs. Our estimates indicate that, from 1991 till 2007, large firms increased their volume of exports by an average of 22% as a result of the direct input cost effect of services reforms, such that the firms that benefited the most typically belonged to industries more dependent on service inputs. Furthermore, convergence to the “best practice” regulatory framework in services would have raised exports at least by an additional 10%. We conclude that firm size is relevant for the connection between services reforms, intermediate input prices and export volumes.

  • 21/02/2017
    1706. The crucial role of social welfare criteria for optimal inheritance taxation (1 MB) Esteban García-Miralles

    This paper calibrates the full social optimal inheritance tax rate derived by Piketty and Saez (2013) and shows that different assumptions on the form of the social welfare function lead to very different optimal inheritance tax rates, ranging from negative (under a utilitarian criterion) to positive and large (even assuming joy of giving motives). The paper also calibrates the optimal tax rate by percentile of the distribution of bequest received, as Piketty and Saez do, but accounting for heterogeneity in wealth and labor income. The result is that the optimal tax rate from the perspective of the non-receivers varies significantly, contrary to the constant tax rate obtained by these authors.

  • 14/02/2017
    1705. The evolution of regional economic interlinkages in Europe (5 MB)

    Published in: Economic Modelling Volume 80, Issue 4, August 2019, Pages 222-243Opens in a new window as "Increasing linkages among European regions. The role of sectoral composition"

    María Dolores Gadea-Rivas, Ana Gómez-Loscos and Danilo Leiva-Leon

    This paper studies the dynamics of the propagation of regional business cycle shocks in Europe and uncovers new features of its underlying mechanisms. To address the lack of high frequency data at the regional level, we propose a new method to measure timevarying synchronization in small samples that combines regime-switching models and dynamic model averaging. The results indicate that: (i) in just two years, the Great Recession synchronized Europe twice as much as the European Union integration process did over several decades; (ii) Ile de France is the region acting as the main channel for the transmission of business cycle shocks in Europe; followed by Inner London and Lombardia; and (iii) we identify a nonlinear relationship between sectoral composition and regional synchronization, which was amplified in the wake of the Great Recession. Similarities in services sectors are primarily responsible for this nonlinear relationship.

  • 26/01/2017
    1704. Creating associations as a substitute for direct bank credit. Evidence from Belgium (553 KB) Mikel Bedayo

    Firms’ incentives to join up with other firms to apply collectively for a single loan are studied empirically in this paper. When several firms make a joint application for a single loan an association of firms is created. We identify the associations that had access to credit in Belgium over the period 2001-2011 and the firms that made up each association, observing the amount of credit that both the firms and the associations obtained from each financial institution they used. We analyse the amount of credit obtained by firms according to whether or not they belonged to an association, the likelihood of firms forming associations, the impact of belonging to an association on the amount of credit firms receive from banks and the effect of firms not obtaining any direct credit on the amount obtained by the associations formed by such firms. We also analyse whether associations formed by common-ownership firms are able to access more credit than other associations. We find that large and long-established firms are more likely to join up with other firms to make joint loan applications and that associations obtain more credit if all their members use the same bank as the association does to obtain credit. Furthermore, the lower a firm’s credit over the previous year, the more likely it is to form an association to obtain credit, and we show that associations comprising small firms with no credit history are especially credit constrained.

  • 25/01/2017
    1703. Dynamic panel data modelling using maximum likelihood: an alternative to Arellano-Bond (550 KB) Enrique Moral-Benito, Paul Allison and Richard Williams

    The Arellano and Bond (1991) estimator is widely-used among applied researchers when estimating dynamic panels with fixed effects and predetermined regressors. This estimator might behave poorly in finite samples when the cross-section dimension of the data is small (i.e. small N), especially if the variables under analysis are persistent over time. This paper discusses a maximum likelihood estimator that is asymptotically equivalent to Arellano and Bond (1991) but presents better finite sample behaviour. Moreover, the estimator is easy to implement in Stata using the xtdpdml command as described in the companion paper Williams et al. (2016), which also discusses further advantages of the proposed estimator for practitioners.

  • 24/01/2017
    1702. Business cycle estimation with high-pass and band-pass local polynomial regression (653 KB) Luis J. Álvarez

    Filters constructed on the basis of standard local polynomial regression (LPR) methods have been used in the literature to estimate the business cycle. We provide a frequency domain interpretation of the contrast filter obtained by the difference between a series and its long-run LPR component and show that it operates as a kind of high-pass filter, meaning it provides a noisy estimate of the cycle. We alternatively propose band-pass local polynomial regression methods aimed at isolating the cyclical component. Results are compared to standard high-pass and band-pass filters. Procedures are illustrated using the US GDP series.

  • 20/01/2017
    1701. Implicit public debt thresholds: an empirical exercise for the case of Spain (704 KB) Javier Andrés, Javier J. Pérez and Juan A. Rojas

    We extend previous work that combines the Value at Risk approach with estimation of the correlation pattern of the macroeconomic determinants of public debt dynamics by means of Vector Auto Regressions (VARs). These estimated models are used to compute the probability that the public debt ratio exceeds a given threshold, by means of MonteCarlo simulations. We apply this methodology to Spanish data and compute time-series probabilities to analyse the possible correlation with market risk assessment, measured by the spread over the German bond. Taking into account the high correlation between the probability of crossing a pre-specified debt threshold and the spread, we go a step further and ask what would be the threshold that maximises the correlation between the two variables. The aim of this exercise is to gauge the implicit debt threshold or “prudent debt level” that is most consistent with market expectations as measured by the sovereign yield spread. The level thus obtained is consistent with the medium-term debt-to-GDP ratio anchor of 60% of GDP.

Contact Us

Publications Unit

Related Information

Publications Search