News and highlights

The Banco de España published its external evaluation of research activities

This Evaluation —initiated in 2022— comprises the critical review of the Banco de España's research with a focus on governance and the impact of research activity on the exercise of the Banco de España's functions, at both national and international level. Click here for the full report.

Joint CEPR and 9th Banco de España History Seminar

The programme for the Joint CEPR and Ninth Banco de España Economic History Seminar, which will take place on 29 September 2023 at the Banco de España headquarters in Madrid is now available. Save the date and register now!

(Participation at the event is free of charge, but registration is compulsory)

Research Feature - September 2023

Underlying inflation and asymmetric risks.
Hervé Le Bihan, Danilo Leiva-León and Matías Pacce

Abstract. We propose a new measure of underlying inflation that provides real-time information on asymmetric risks in the inflation outlook. The new indicator is based on a multivariate regime-switching framework estimated using disaggregated sub-components of euro area Harmonized Index of Consumer Prices (HICP) and has several additional advantages. First, it can swiftly infer abrupt changes in underlying inflation. Second, it helps track turning points in underlying inflation on a timely basis. Third, the proposed indicator also performs satisfactorily vis-à-vis several criteria relevant to inflation monitoring. Click here.

Research Feature - August 2023

The public investment multiplier in a production network
Alessandre Peri, Omar Rachedi and Iacopo Varotto

Abstract. Aggregate and sectoral effects of public investment crucially depend on the interaction between the output elasticity to public capital and Input-Output linkages. We uncover this fact through the lens of a New Keynesian production network. This setting doubles the socially optimal amount of public capital relative to the one-sector model, leading to a substantial amplification of the public-investment multiplier. We also document novel sectoral implications of public investment. Although public investment is concentrated in far fewer sectors than public consumption, its effects are relatively more evenly distributed across industries. We validate this model implication in the data. Click here.

Research Feature - June 2023

Inflation persistence, noisy information and the Phillips curve
José-Elías Gallegos

Abstract. A vast literature has documented that US inflation persistence has fallen in recent decades, but this finding is difficult to explain in monetary models. Using survey data on inflation expectations, I document a positive co-movement between ex-ante average forecast errors and forecast revisions (suggesting forecast sluggishness) from 1968 to 1984, but no co-movement afterward. I extend the New Keynesian setting to include noisy and dispersed information about the aggregate state and show that inflation is more persistent in periods of greater forecast sluggishness. My results suggest that changes in firm forecasting behavior explain around 90% of the fall in inflation persistence since the mid-1980s. I also find that the changes in the dynamics of the Phillips curve can be explained by the change in information frictions. After controlling for changes in information frictions, I estimate only a modest decline in the slope. I find that a more significant factor in the dynamics of the Phillips curve is the shift towards greater forward-lookingness and less backward-lookingness. Finally, I find evidence of forecast underrevision in the post-COVID period, which explains the increase in the persistence of current inflation. Click here.

Research Feature - May 2023

Credit line runs and bank risk management: evidence from the disclosure of stress test results 
José E. Gutiérrez and Luis Fernández Lafuerza

Abstract. As noted in recent literature, firms can run on credit lines due to fear of future credit restrictions. We exploit the 2011 stress test supervised by the European Banking Authority (EBA) and the Spanish Central Credit Register to explore: 1) the occurrence and magnitude of these runs after the release of negative stress test results; and 2) banks’ behaviour before and after the release of this information. We find that, following the release of the results, firms drew down approximately 10 pp more available funds from lines granted by banks that had a worse performance in the stress test. Moreover, before the release date, poorer performing banks were more likely to reduce the size of credit lines, while those with more significant balances of undrawn credit lines were more likely to cut term lending. Click here.

Research Feature - April 2023

Do Renewables Create Local Jobs?
Natalia Fabra, Aitor Lacuesta, Eduardo
Gutiérrez and Roberto Ramos

Abstract. We investigate whether investments in renewable energy – solar and wind plants – create jobs in the municipality where they are located. Using 13 years of monthly data, we exploit the variation in the timing and size of investment projects across more than 3,200 municipalities in Spain, a country with substantial investments in this area. We use a new estimator for staggered differences-in-differences analysis that extends the local projections approach with clean controls (Dube et al., 2022). We find strong heterogeneity in the magnitude and pattern of the impacts of solar and wind investments. On average, solar investments increase employment by local firms, but the effects on the unemployment of local residents are weak. The effects of wind investments on local employment and unemployment are mostly non-significant. These findings have important implications for public policy. Click here.

Research Feature - March 2023

Could Spain be less different? Exploring the effects of macroprudential policy on the house price cycle
Adrián Carro

Abstract. Employing an agent-based model of the Spanish housing market, this paper explores the main drivers behind the large amplitude of the Spanish house price cycle —as compared to most other European countries—, as well as the scope for macroprudential policy to reduce this amplitude. First, we exploit the availability of a previous calibration to the UK, characterised by a smaller house price cycle, to show the prominent role played by the distributions of various mortgage risk metrics: loan-to-value, loan-to-income and debt-service-to-income ratios. Second, we use the model to calibrate both a hard loan-to-value and a soft loan-to-income limit to smooth the Spanish house price cycle and match the amplitude of the UK equivalent. Finally, we characterise the effects of these calibrated policies over the different phases of the cycle, finding both instruments to reduce credit and price growth during the expansionary phase as well as to reduce their decline during the contractionary phase. Moreover, both instruments lead to a compositional shift in lending: the loan-to-value policy from first-time buyers to buy-to-let investors and the loan-to-income policy from both first-time buyers and home movers to buy-to-let investors. Click here.

Research Feature - February 2023

Using Newspapers for Textual Indicators: Which and How Many?
Erik Andrés-Escayola, Corinna Ghirelli, Luis Molina, Javier J. Pérez and Elena Vidal

Abstract. This paper investigates the role that two key methodological choices play in the construction of textual indicators: the selection of local versus foreign newspapers and the breadth of the press coverage (i.e. the number of newspapers considered). The literature is almost silent about the robustness of the results with respect to these choices. We use as a case study the well-known economic policy uncertainty (EPU) index, taking as examples six Latin American countries and Spain. We develop EPU measures based on press with different levels of proximity, i.e. local versus foreign, and corroborate that they deliver broadly similar narratives and economic responses in a Bayesian vector autoregressive framework. Then, we show that constructing EPU indexes based on only one newspaper yields biased responses. This suggests that it is important to maximize the breadth of press coverage when building text-based indicators. That is, the larger the press coverage, the better. Click here.

Enrique Moral-Benito, winner of the SERIEs Award 2022

The SERIEs Award 2022 of the Asociación Española de Economía (AEE) has been awarded to Enrique Moral-Benito for his paper “Growing by learning: firm-level evidence on the size-productivity nexus,” SERIEs, vol. 9, issue 1, March 2018. The Award, established in 2014, is given every two years to an outstanding research contribution published in SERIEs over the past four years. The selection of the awarded article is based on the scientific excellence and it is carried out by a committee of three researchers appointed by the Executive Commission of the AEE. For more information, click here.

ECB's Sintra Young Economist Prize 2023

The ECB has launched a new edition of the Young Economist Prize as part of the ECB Forum on Central Banking. PhD students in the areas of economics or finance are welcome to submit their papers by 13 February for the chance to win €10,000 and present their research to top policymakers and academics at the ECB Forum in Central Banking, which will take place in Sintra, Portugal on 26 June - 28 June 2023. For more information, click here.

Research Update Fall 2022

This issue includes several articles summarizing policy-relevant findings from recent Banco de España projects in diverse areas of research. In this edition you can find the following Research Features: 

- Dual returns to experience
- Asset holdings, information aggregation in secondary markets and credit cycles
- The propagation of worldwide sector-specific shocks
- New Facts on Consumer Price Rigidity in the Euro Area
- Mortgage Securitization and Information Frictions in General Equilibrium
- The Unequal Consequences of Job Loss across Countries

In addition, the Research Update reports on recent conferences, publications, recent hires and other announcments. 

You can access to the Fall 2022 edition here

Research Feature - January 2023

Macroprudential FX Regulations: Sacrificing Small Firms for Stability?
María Alejandra Amado

Abstract. Macroprudential FX regulation may reduce systemic risk; however, little is known about its unintended consequences. In this paper I study the implementation of a macroprudential FX tax by the Peruvian Central Bank. Using administrative data on the universe of formally registered firms, I show that a 10% increase in bank exposure to the policy increases the disparities in loan growth between small and large firms by 1.6 percentage points. When accounting for firms switching to local currency (soles) financing from different banks, the effect on large firms' debt is only compositional. Moreover, using data on the universe of FX contracts, I find that firms that are mostly affected by the policy are not hedged against exchange rate risk. Consistent with my empirical findings, I describe a mechanism in which currency mismatch acts as a means for relaxing small firms’ borrowing constraints and show that policies taxing dollar lending increase financing disparities between small and large firms. Click here.

Research Feature - November 2022

The term structure of interest rates in a heterogeneous monetary union
James Costain, Galo Nuño and Carlos Thomas
Abstract. We build a structural model of yield curves in a monetary union where the central bank’s bond purchases affect the probability of peripheral default. A euro area calibration shows that asset purchases affect peripheral yields mainly through “default risk extraction”, whereby purchases reduce both the amount of sovereign risk that the market must absorb, and the probability of sovereign default. Counterfactual simulations show that the PEPP’s flexibility enhanced its effectiveness, contributing approximately 15bp to the overall 80bp impact of the initial PEPP announcement on Italian yields, without changing German yields. Flexibility could again prove valuable in future ECB asset purchase programs, if the smooth transmission of monetary policy to all euro area countries is compromised by unwarranted fragmentation. Click here

We are on the Job Market!

The Bank of Spain seeks to hire PhDs in economics, finance or related fields, with experience or recent graduates, for our headquarters in Madrid. We have a special interest in candidates with a focus on monetary and fiscal policies, finance, environmental economics, macroeconomic modelling, empirical microeconomics and industrial organization. A good command of written and spoken Spanish will be highly valued.

The Bank of Spain offers an excellent work and research environment, an attractive benefits package, the opportunity to collaborate with a team of committed and highly-qualified professionals, and to participate in working groups with other international institutions. For more details click here

Research Feature - October 2022

The Unequal Consequences of Job Loss accross Countries 
Abstract. We document the consequences of losing a job across countries using a harmonized research design and administrative data from Social Security. Workers in Denmark and Sweden experience the lowest earnings declines following job displacement, while workers in Italy, Spain, and Portugal experience losses three times as high. French and Austrian workers face earnings losses somewhere in between. Key to these differences is that Southern European workers are less likely to find employment following displacement. The transition to worse-paying jobs after job displacement explains a substantial portion of wage losses in all countries, around 50% or more in most countries. Click here

Research Feature - September 2022

Mortgage Securitization and Information Frictions in General Equilibrium Abstract. I develop a macro model of the U.S. housing finance system that delivers an equilibrium connection between the securitization and mortgage credit markets. An endogenous securitization market efficiently reallocates illiquid assets, increases liquidity to fund mortgage lending, and lowers interest rates for borrowers. However, its benefits are hindered by originators’ private information about loan quality which leads to adverse selection in securitization. Fluctuations in household credit risk induce expansion and contractions of mortgage credit through the securitization liquidity channel. Adverse selection generates a multiplier effect of household shocks. Applying the theory to the Great Financial Crisis, I quantify that information frictions amplified the observed mortgage credit contraction by a factor of 1.5. The multiplier is an endogenous function of the severity of information frictions. A subsidy policy in the securitization market can stabilize liquidity and credit cycles. Click here.

Research Feature - August 2022

New Facts on Consumer Price Rigidity in the Euro Area. In this paper, we build a novel dataset with 135 million pricing quotes from 11 euro area countries (including the largest ones), representing about 60% of the euro area consumption basket, to document various facts regarding price rigidity in the low inflation period from 2010 to 2019. We find that prices are sticky, with 12.3% of prices changing every month on average (8.5% when excluding sales), and a median price increase (respectively, decrease) of 9.6% (respectively, 13%). There are small differences between countries, and larger differences across sectors. Although neither frequency nor size exhibit significant time trends, we find that the latter is a much more important contributor to the overall inflation dynamics. Moreover, firms respond to aggregate supply and demand shocks by changing the size of their price adjustments but not the frequency. Click here.

Research Feature - July 2022

The propagation of worldwide sector-specific shocks. How does a shock in a specific sector propagate along the global production network? What is the aggregate impact when a common shock affects simultaneously the same industry across different countries? In this work we provide a useful framework to account for several policy-relevant scenarios, such as changes in environmental regulations or the implementation of new technologies. For that purpose, we highlight the importance of departing from standard linear models that assume perfect input substitution (i.e. unitary elasticity). We combine a theoretical framework of production networks with arbitrary elasticities of substitution (Baqaee & Farhi, 2019) and we make use of World Input-Output Database (WIOD) to account for international linkages. This setting illustrates how, in the presence of production input complementarities, the interaction between simultaneous sector-specific shocks has significant non-linear effects on sectoral composition and aggregate output. The aggregate impact of negative (positive) shocks gets significantly amplified (mitigated) when they affect simultaneously industries with strong production linkages. Our results show that ignoring production complementarities leads to vastly underestimating the aggregate consequences of regulatory or technological shocks in industries like chemicals or vehicle manufacturing. In contrast, simultaneous shocks to services industries are well accounted for by standard measures. Click here.

Research Update Spring 2022

This issue includes several articles summarizing policy-relevant findings from recent Banco de España projects in diverse areas of research. In this edition you can find the following Research Features: 

- Roots and Recourse Mortgages: Handing back the keys
- Brexit: Trade diversion due to trade policy uncertainty
- Firm Hetereogeneity, Capital Misalloaction and Optimal Monetary Policy
- The impact of heterogeneous unconventional monetary policies on the expectations of markets clashes
- Asset encumbrance and Bank Risk: Theory and First Evidence from Public Disclosures in Europe.   

In addition, the Update reports on recent conferences and publications. 

You can access to the Spring 2022 edition here.