nep-eec New Economics Papers
on European Economics
Issue of 2014‒09‒05
seventeen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Common Macroeconomic Shocks and Business Cycle Fluctuations in Euro Area Countries By Antonio Ribba; Antonella Cavallo
  2. Can interest rate spreads stabilize the euro area? By Jacek Kotłowski; Michał Brzoza-Brzezina; Kamil Wierus
  3. Domestic demand pressure and export dynamics – An empirical threshold model analysis for six euro area countries By Ansgar Belke; Anne Oeking; Ralph Setzer
  4. Credit Rating Agency Downgrades and the Eurozone Sovereign Debt Crises By Christopher Baum; Margarita Karpava; Dorothea Schäfer; Andreas Stephan
  5. EMU Imbalances in a Two-Country Overlapping Generations Model By Karl Farmer
  6. Nowcasting and Forecasting Economic Growth in the Euro Area using Principal Components By Irma Hindrayanto; Siem Jan Koopman; Jasper de Winter
  7. Household saving behavior and credit constraints in the Euro area By Le Blanc, Julia; Porpiglia, Alessandro; Teppa, Federica; Zhu, Junyi; Ziegelmeyer, Michael
  8. Export-led growth in Europe: Where and what to export? By Ana Paula Ribeiro; Paula Gracinda Teixeira Santos; Vitor Carvalho
  9. Another contraction in European household credit markets: Key findings from the ECRI Statistical Package By Bouyon, Sylvain; Boeri, Filippo
  10. What common factors are driving inflation in CEE countries? By Aleksandra Halka; Grzegorz Szafrański
  11. Credit Rating Impact on European Stock Markets By Jose Faias; Ana Mão de Ferro; Carlos Moreira
  12. An estimated DSGE model of a Small Open Economy within the Monetary Union: Forecasting and Structural Analysis By Yuliya Rychalovska; Massimiliano Marcellino (EUI)
  13. Capital Flows and Financial Intermediation: is EMU different? By Bezemer, Dirk; Samarina, Anna
  14. Trends in Real Convergence and Structural Changes in EU By Lucian-Liviu Albu
  15. Stability and Eurozone membership: Should a small transition country join? By Timo Baas
  16. The Determinants of Total Factor Productivity in the EU: Insights from Sectoral Data and Common Dynamic Processes By Agnieszka Gehringer; Inmaculada Martinez-Zarzoso; Felicitas Nowak.Lehmann Danziger
  17. Update and re-estimation of the quarterly model of Banco de España (MTBE) By Samuel Hurtado; Pablo Manzano; Eva Ortega; Alberto Urtasun

  1. By: Antonio Ribba; Antonella Cavallo
    Abstract: This paper investigates the dynamic effects of common macroeconomic shocks in shaping business cycle fluctuations in a group of Euro-area countries. In particular, by using the structural (Near)VAR methodology, we investigate the effect of area-wide shocks, with particular attention to monetary policy shocks, on the evolution of inflation and output of the national economies. Preliminary results show that there are two distinct groups of countries: a first group, including the biggest European economies, in which business cycle fluctuations are mainly explained by common, areawide shocks; a second one, including Greece, Ireland and Portugal, in which the national shocks play, instead, a much greater role.
    Keywords: Euro-area countries , Business cycles, Macroeconometric modeling
    Date: 2014–07–03
  2. By: Jacek Kotłowski; Michał Brzoza-Brzezina; Kamil Wierus
    Abstract: Over the last few years significant spreads arose for both public and private debt between euro area countries. We check whether these spreads could be made to work towards the goal of providing more stability to the euro area. In particular we focus on reducing the imbalances that arose between the core and peripheral members of the euro area in the first decade of its existence. The idea is that stable, positive spreads in peripheral countries could have decreased domestic demand thus preventing the boom-bust cycles that plagued these economies. They could also prevent such developments in the future.Panel data analysis.Our results show that spreads between real interest rates of 1.5 to 5.8 percentage points would be necessary to reduce current account deficits in the four peripheral countries (Greece, Portugal, Ireland and Spain) to levels that would have stabilized these countries net foreign asset positions. The policy conclusion from this paper is that instead of fighting spreads accross the board, the ECB could accept their existence, provided that they behave in a relatively stable way and are close to the equilibrium levels that we calculate. Otherwise it cannot be excluded that the history of diverging current account balances, lost competitiveness and sharply rising spreads at the least desireable moment will repeat itself in a few years.
    Keywords: EA countries, Monetary issues, Microsimulation models
    Date: 2014–07–03
  3. By: Ansgar Belke; Anne Oeking; Ralph Setzer
    Abstract: Traditional specifications of export equations incorporate foreign demand as a demand pull factor and the real exchange rate as a relative price variable. However, such standard export equations have failed to explain the export performance of euro area countries during the crisis period. In particular, the significant gains in export market shares in a number of vulnerable euro area crisis countries did not coincide with an appropriate improvement in price competitiveness. This paper argues that, under certain conditions, firms consider export activity as a substitute of serving domestic demand. The strength of the link between domestic demand and exports is dependent on capacity constraints. Our econometric model for six euro area countries suggests domestic demand pressure and capacity constraint restrictions as additional variables of a properly specified export equation. As an innovation to the literature, we assess the empirical significance through the logistic and the exponential variant of the nonlinear smooth transition regression model. In the first case, we differentiate between positive and negative changes in capacity utilization and in the second case between small and large changes of the same transition variable. We find that domestic demand developments are relevant for the short-run dynamics of exports when capacity utilization is low. For some countries, we also find evidence that the substitution effect of domestic demand on exports turns out to be stronger the larger is the deviation of capacity utilization from its average value over the cycle.
    Keywords: Euro area countries: Spain, Portugal, Italy, France, Ireland and Greece, Macroeconometric modeling, Monetary issues
    Date: 2014–07–03
  4. By: Christopher Baum; Margarita Karpava; Dorothea Schäfer; Andreas Stephan
    Abstract: This paper studies the impact of credit rating agency (CRA) downgrade announcements on the value of the Euro and the yields of French, Italian, German and Spanish long-term sovereign bonds during the culmination of the Eurozone debt crisis in 2011-2012.GARCH modeling of sovereign bond yields and the value of the EuroCRA downgrade announcements negatively affected the value of the Euro currency and also increased its volatility. Downgrading increased the yields of French, Italian and Spanish bonds but lowered the German bond's yields. We infer from these findings that CRA announcements significantly influenced crisis-time capital allocation in the Eurozone.
    Keywords: France, Italy, Germany, Spain, Impact and scenario analysis, Finance
    Date: 2014–07–03
  5. By: Karl Farmer
    Abstract: The present sovereign debt crisis in the Economic and Monetary Union of the EU (EMU) is partly attributable to the pronounced increase in external imbalances across northern and southern euro zone countries during the years running up to 2007 (Lane and Milesi-Ferretti, 2011). While the behavior and extent of external imbalances during the pre-crisis period is empirically well documented (e.g. Lane and Pels 2012) it remains an open theoretical question how the evolution of the observed external imbalances can best be reproduced within an intertemporal general equilibrium model of the EMU. Fagan and Gaspar (2008) compare in a two-good, two-country Yaari (1965)-Blanchard (1985) overlapping generations (OLG) pure exchange model without government debt the pre-euro financial autarky steady state to euro-related financial integration between northern and southern euro countries (called core and periphery, respectively). They find that the evolution of intra-EMU external imbalances can be traced back to North-South differences in time preference. While the neglect of production and capital accumulation may be justified by the similarity of northern and southern GDP growth rates in the pre-crisis period the rather huge private capital movements from core to periphery over this period suggest a two-country overlapping generations model with production and private capital accumulation in order to check whether the observed EMU external imbalances can be attributed to differences in economic fundamentals within this model framework, too. In addition, we introduce government debt into our basic model in order to investigate whether in view of the pre-crisis time-stationarity in the debt to GDP ratios of both EMU core and periphery the observed external imbalances can be traced back to which economic fundamentals. Thus, there are two main objectives of the paper: First, to present stylized facts regarding the intra-EMU macroeconomic data running up to the financial crisis 2007 in order to motivate the model set-up. Secondly, to develop a two-zone OLG model with production, capital accumulation and government debt in order to figure out how EMU’s North-South external imbalances can be attributed to financial integration due to the common currency. To pursue the second objective, a one-good, two-country Diamond (1965)-Buiter (1981) OLG model with time preference and technological differences across countries (e.g. EMU’s North, South) and time-stationary debt to GDP ratios will be developed. It will be used (i) to see how the pre-euro real interest differential between EMU South (periphery) and EMU North (core) can be depicted in the proposed model and (ii) whether the observed external imbalances (net foreign asset positions) can be referred to the euro-related interest rate convergence between EMU core and periphery. Both countries in the model economy are interconnected through free international trade in commodities, real capital and bonds emitted by national governments. The objective of this highly stylized model is to figure out major economic mechanisms triggering the observed intra-EMU imbalances in the run-up towards the global financial crisis. This is clearly the first step to set up a dynamic applied general equilibrium model along the lines of Fagan and Gaspar (2008). The author finds that the pre-euro real interest differential can be attributed to a relatively high time preference, low total factor productivity and high capital production share in the periphery. Exactly these differences in economic fundamentals cause the pre-crisis evolution of the external imbalances among EMU core and periphery.
    Keywords: EMU, Finance, General equilibrium modeling
    Date: 2013–06–21
  6. By: Irma Hindrayanto (De Nederlandsche Bank); Siem Jan Koopman (VU University Amsterdam, the Netherlands); Jasper de Winter (De Nederlandsche Bank, the Netherlands)
    Abstract: Many empirical studies have shown that factor models produce relatively accurate forecasts compared to alternative short-term forecasting models. These empirical findings have been established for different macroeconomic data sets and different forecast horizons. However, various specifications of the factor model exist and it is a topic of debate which specification is most effective in its forecasting performance. Furthermore, the forecast performances of the different specifications during the recent financial crisis are also not well documented. In this study we investigate these two issues in depth. We empirically verify the forecast performance of three factor model approaches and report our findings in an extended empirical out-of-sample forecasting competition for quarterly growth of gross domestic product in the euro area and its five largest countries over the period 1992-2012. We also introduce two extensions of existing factor models to make them more suitable for real-time forecasting. We show that the factor models have been able to systematically beat the benchmark autoregressive model, both before as well as during the financial crisis. The recently proposed collapsed dynamic factor model shows the highest forecast accuracy for the euro area and the majority of countries that we have analyzed. The forecast precision improvements against the benchmark model can range up to 77% in mean square error reduction, depending on the country and forecast horizon.
    Keywords: Factor models; Principal component analysis; Forecasting; Kalman filter; State space method; Publication lag; Mixed frequency
    JEL: C32 C53 E17
    Date: 2014–08–22
  7. By: Le Blanc, Julia; Porpiglia, Alessandro; Teppa, Federica; Zhu, Junyi; Ziegelmeyer, Michael
    Abstract: We study the role of household saving behaviour, of individual motives for saving and that of perceived liquidity constraints in 15 Euro Area countries. The empirical analysis is based on the Household Finance and Consumption Survey, a new harmonized data set collecting detailed information on wealth holdings, consumption and income at the household level. Since the data is from 2010-2011, strong conclusions as regards the present are difficult to draw. This is because the crisis may have affected the data, especially in countries that were severely hit. Nevertheless we find evidence of some degree of homogeneity across countries with respect to saving preferences and the relative importance of different motives for saving. In addition, credit constraints are more heterogeneous across geographic regions and perceived to be binding for specific groups of respondents. Households living in Mediterranean countries report to be more subject to binding liquidity constraints than households living in Continental Europe. Household characteristics and institutional macroeconomic variables are significant and economically important determinants of household saving preferences and credit constraints. --
    Keywords: Household Finance and Consumption,Life Cycle Saving,Survey Data
    JEL: C8 D12 D14 D91
    Date: 2014
  8. By: Ana Paula Ribeiro; Paula Gracinda Teixeira Santos; Vitor Carvalho
    Abstract: From the late 70s onwards, the literature has produced numerous studies, mostly for developing countries, relating exports and economic growth. Since several European Union (EU) countries face strong recessions in the sequence of the economic crisis and the related fiscal consolidation measures, exports emerge as a meaningful source of growth for developed countries with rather stagnant domestic markets. In this context, we assess if and how the product and the destination structures of exports shape the growth dynamics for the EU countries. Estimation of fixed effects model using panel data of 23 European Union (EU) members over the period 1995-2010. We find that economic growth is foster through export specialization in high value-added products, such as manufactures and high-technology. Moreover, we find evidence that higher growth is fostered by export diversification across partners while enlarging the portfolio of partners, mainly to less developed and more distant countries, has negative impacts on European growth. Unambiguously, relative concentration of exports should be directed towards higher growth countries.
    Keywords: European Union (EU)., Growth, Macroeconometric modeling
    Date: 2013–06–21
  9. By: Bouyon, Sylvain; Boeri, Filippo
    Abstract: The ECRI Statistical Package 2014 Lending to Households reveals that the total amount of outstanding household real debt at end-2013 contracted for the third consecutive year in both the EU member states (EU27) and the euro area (EA17). All in all, indicators point to less divergent growth patterns across member states in 2013, as the standard deviation of the sample in domestic currency recorded its lowest value in more than 15 years. Still, pronounced corrections continued in a few countries, especially in Slovenia, Portugal, Spain, Hungary and Latvia. The successive yearly contractions in the EU27 occurred despite significant easing in interest rates in many markets over the last few years. Gross disposable income of households, which is one of the main drivers behind households’ demand, and housing prices, which can affect both demand and supply of loans, have had strong effects on the dynamics of household debt since 2007. Considering household debt-to-GDP ratios, long-term comparisons between the different groups of countries composing the EU27 show that no convergence was observed across these groups and across EU27 countries in the years preceding the financial crisis. However, partly as a result of the 2008-09 financial crisis and its long-lasting effects, strong convergence was registered across EU27 countries between 2007 and 2013. Regarding non-financial corporation (NFC), the outstanding debt decreased again in 2013 in both the EU27 and the euro area. In 2013, the correction intensified in nominal terms in both the EU27 and the EA17, but slowed down in real terms in comparison with 2012. The Key Findings relate to the more detailed ECRI 2014 Statistical Package covering 38 countries: the 27 EU member states, three EU candidate countries (Croatia, Turkey and the Former Yugoslav Republic of Macedonia), the EFTA countries (Iceland, Liechtenstein, Norway and Switzerland) and four key global economies (the United States, Australia, Canada and Japan). The purpose of the package is to provide reliable statistical information that allows users to make meaningful comparisons in time and between these countries.
    Date: 2014–08
  10. By: Aleksandra Halka; Grzegorz Szafrański
    Abstract: The aim of the research is to find common driving forces in the inflation development across 10 emerging economies from the Central and Eastern Europe (CEE). As opposite to the previous research on this subject we are going to differentiate not only between regional and country specific common factors. We also believe that there are some common price movements across the particular sectors in the CEE countries. The common trends may stem from the fact that all the countries in the region have undergone the period of structural (market) reforms, foreign trade liberalization (especially with EU countries), productivity improvements and hyperinflation on the unprecedented scale. Afterwards, a common source of price determination across the region was the economic stabilization towards meeting Economic and Monetary Union (EMU) criteria of nominal and fiscal convergence. In the last decades we also observe a growing synchronization of the business cycle among these economies. We decompose product-level HICP indices into common aggregate (regional in terms of CEE countries), country, and sector specific components to study the co-movements in inflation rates across group of CEE countries in a systematic manner. To this end we apply a hierarchical factor model with an overlapping country-sector structure and estimate it with an iterative method of Beck, Hubrich and Marcellino (2011). Our findings are also closely related to the hypotheses on differences in the degree of volatility and persistence at the aggregate and disaggregate level (Bils and Klenov, 2004, Klenow and Kryvtsov, 2008, Boivin, Giannoni, and Mihov, 2009, Maćkowiak and Wiederholt, 2009).The research finds a considerable degree of price co-movements across countries and sec-tors. The more open economies the more vulnerable they are to external shocks coming from changes in commodity prices, exchange rates and other parts of financial global market. We find that all common factors explain about 36.5% of variance in product-level monthly price changes. Among them the most important are two aggregate (regional) factors that contribute to about half of the total variance explained (17%), less important are country (6.5%) and sector-specific (3%) components. The contribution of CEE regional component varies considerably between different countries and sectors. It is the most prominent determinant of inflation in Romania (explaining 55% of price variability), and the least important for Estonia (10%), the Czech Republic (8%) and Slovenia (6%). For the other countries the fraction of explained variance is between 13% (Poland) and 18% (Bul-garia). The regional CEE component explains from 11% of variance in food and non-durable sector to 24% in services on average being the most important price determinant in each of them. The first regional common factor may be associated with the disinflationary process explaining lowering of the inflation expectations that occurred in CEE countries, whereas the second regional factor reveals correlations with the global factors, especially commodity prices and euro area price development. As the sector specific factors are concerned, according to the expectations, prices of food and other non-durable goods (which mostly consist of energy goods) strongly depend on the commodity markets. Prices of services revel the highest correlation with the unemployment in the analyzed countries mirroring the impact of the business cycles on the prices in services., though it is not a strong one. Surprisingly there is hardly no influence of the changes in the global or domestic economic activity on the prices of durable and semi-durable goods. Probably it is due to the fact, these prices of these components are influenced by the globalization process, which leads to the price decreases regardless the phase of the business cycle.
    Keywords: Central and Eastern Europe (CEE) countries, Macroeconometric modeling, Monetary issues
    Date: 2014–07–03
  11. By: Jose Faias; Ana Mão de Ferro; Carlos Moreira
    Abstract: The impact of credit rating changes in both the bond and the stock market has been a widely discussed subject in the press since the outburst of the financial crises we are going through nowadays. However, the scientific coverage of the topic has been limited since 2007 and has not focused on advanced economies. Therefore, in this paper, we study home and foreign stock market impacts of sovereign credit rating downgrades by Standard and Poor’s in Europe – focusing on Portugal, Ireland, Italy, Greece and Spain – since 2008. To understand if sovereign credit rating changes by S&P impact market returns and convey new information to the market, we performed an event study of the downgrade impact on the above mentioned countries index returns using S&P 500 index as a benchmark to calculate the abnormal returns. In terms of own market effect, we confirm the existence of a statistically significant average abnormal market reaction of minus 140 basis points to credit downgrades. These results are robust to changes in the benchmark, in the estimation window, in our country sample and to different statistical methodology for t-stat computation. We find that when there is a credit rating downgrade, other European countries tend to underperform vis-à-vis the S&P 500 (the selected benchmark) by approximately 38 basis points.
    Keywords: Portugal, Spain, Italy, Greece, Finance, Miscellaneous
    Date: 2013–06–21
  12. By: Yuliya Rychalovska; Massimiliano Marcellino (EUI)
    Abstract: In this paper we build and estimate a two-region DSGE model of a small open economy within the European Monetary Union. We evaluate the properties of the estimated model and assess its forecasting performance (point and density) relative to reduced form models such as VARs. In addition, we study the empirical validity of the DSGE model restrictions (based on micro-foundations) by applying a DSGE-VAR approach. Finally, the estimated model is used to analyze the sources of macroeconomic fluctuations and examine the We allow for a sufficiently rich specification which enables us to include unemployment as well as open economy variables such as the real exchange rate into the estimation procedure, along with the standard macroeconomic and labor market indicators. The model contains a set of frictions and structural shocks typically used in the DSGE literature. We evaluate the properties of the estimated model and assess its forecasting performance relative to reduced form models such as VARs. In addition, we study the empirical validity of the DSGE model restrictions by applying a DSGE-VAR approach. Finally, the estimated model is used to analyze the sources of macroeconomic fluctuations and examine the responses of the economy to structural shocks. The model is built in the New Keynesian tradition and contains real and nominal rigidities such as habit formation in consumption, price and wage stickiness as well as rich stochastic structure. The framework also incorporates the theory of unemployment as in Gali et al. (2011), small open economy aspects and a nominal interest rate that is set exogenously by the area-wide monetary authority. The model is estimated using Bayesian techniques. We demonstrate that the estimated DSGE model is relatively well identified, has good data fit and reasonably estimated parameters. In addition, the model shows a competitive forecasting performance (in terms of both point and density) compared to reduced form models such as VARs. In this respect, our results are in line with the conclusions reached in previous studies that the new generation of DSGE models no longer faces the tension between rigor and fit. In particular, we illustrate that the DSGE model produces sizable one-step-ahead forecasting gains in terms of RMSE and the Score over the unrestricted VAR, especially for such variables as GDP, real exchange rate, unemployment and real wages. The predictions stay competitive at longer forecasting horizons. DSGE-VAR analysis demonstrates that the optimal weight on the DSGE restrictions is significant and the VAR(2) correction is not helpful in improving the DSGE model fit. At the same time, the DSGE-based prior significantly improves the short term forecast accuracy of the unrestricted VAR for output, and also determines a superior performance of the DSGE-VAR model in predicting exchange rate, unemployment and wages over all the forecast horizons considered here. When compared to an atheoretical Minnesota-style prior, the DSGE restrictions appear to be more useful in forecasting output and REER, whereas the opposite is true for employment. Application of the model to the analysis of the business cycle fluctuations demonstrates that "open economy" disturbances such as relative price, foreign demand and interest rate shocks explain a significant portion of the variation of output growth, inflation, real exchange rate and employment. Price and wage markup shocks are important determinants of inflation and real wages dynamics respectively.
    Keywords: Euro Area, Luxembourg, General equilibrium modeling, Forecasting and projection methods
    Date: 2013–06–21
  13. By: Bezemer, Dirk; Samarina, Anna (Groningen University)
    Abstract: The share of domestic bank credit allocated to non-financial business declined significantly in EMU economies since 1990. This paper examines the impact of capital inflows on domestic credit allocation, taking account of (future) EMU membership. The study utilizes a novel data set on domestic credit allocation for 38 countriesover 1990?2011 and data on capital inflows into the bank and non-bank sectors. We estimate panel models controlling for initial financial development, income level, inflation, interest rate, credit market deregulation and current account positions. The results suggest that the decline in the share of credit to non-financial business was significantly larger in (future) EMU economies which experienced more capital inflows into their non-bank sectors. We discuss implications.
    Date: 2014
  14. By: Lucian-Liviu Albu
    Abstract: Stadial development of countries is among consequences of the neoclassical growth model, called also as Solow model. Moreover, the model, supported by empirical studies, contributed to more refined analysis of economic development on a historical scale and to estimate future dynamics of economic systems. Studying together structural changes and convergence is a relatively new topic in literature. By using available statistical data for last decade we estimated parameters of a model that can be useful to simulate structural changes in European Union. Moreover, based on applying a set of concentration indicators (Lorenz curve and its derived indicators, as Gini coefficient, variation coefficient, etc.), we evaluate the real convergence and the so-called structural convergence, at the EU level (EU-27), but also inside of Eastern group of countries (EU-10) and inside of Western group of countries (EU-15). As a main conclusion, a general tendency of convergence was demonstrated at the EU level. However, between the two groups of countries, there were some significant differences both in matter of real convergence and in matter of structural convergence. See above See above
    Keywords: EU , Impact and scenario analysis, Miscellaneous
    Date: 2013–06–21
  15. By: Timo Baas
    Abstract: In the last years, Baltic countries joined or prepare to join the European Monetary Union. Accession comes in a time, were trading share between these countries and the Eurozone are declining. From a theoretical point of view, the optimality of currency unions depends on bilateral trade between it's members. In this paper it is shown that countries might benefit from a currency union as an alternative to fixed exchange rates. Using a DSGE model of a small country and a currency union, it is shown that membership in the union is beneficial to a fixed exchange rate system without a common monetary policy in terms of output and price stability. This result is robust even if trading shares decline significantly.In this paper we compare different monetary policy rules in a two-country open-economy DSGE model with Calvo price setting. Membership in the currency union is always beneficial in terms of macroeconomic stability. The benefits of joining a monetary union, however, are increasing with a declining share of foreign goods in the consumption basket of domestic households. The decision of Baltic countries to join the monetary union, therefore, is a second best solution in an environment were there is a fear of floating.
    Keywords: Baltic countries, General equilibrium modeling, EU enlargement
    Date: 2014–07–03
  16. By: Agnieszka Gehringer; Inmaculada Martinez-Zarzoso; Felicitas Nowak.Lehmann Danziger
    Abstract: This paper examines the development of total factor productivity (TFP) and the drivers of TFP for a panel of 17 EU countries in the period of 1995-2007. We estimate aggregated and sectoral TFP for 17 EU countries by means of the augmented mean group estimator to control for endogeneity, cross-section dependence and heterogeneous production technology. We find that although wages are the main driver of TFP, ICT, extra-EU trade and human capital also play a role.
    Keywords: 17 EU countries , Growth, Sectoral issues
    Date: 2013–06–21
  17. By: Samuel Hurtado (Banco de España); Pablo Manzano (Banco de España); Eva Ortega (Banco de España); Alberto Urtasun (Banco de España)
    Abstract: The Quarterly Model of Banco de España (MTBE, Modelo Trimestral del Banco de España) is a large-scale macro-econometric model used for medium term macroeconomic forecasting of the Spanish economy, as well as for evaluating the staff projections and performing scenario simulations. The model is specified as a large set of error correction mechanism equations, and, especially in the short run, is mostly demand driven. This paper presents an update of the model, estimated with data from 1995-2012. In this new version, private productive investment and employment react more to output, capturing the higher sensitivity of these variables observed during the crisis, and prices and wages react less both to each other and to the evolution of real variables. Credit is now an endogenous variable in the model and it also helps explain the behaviour of the main demand components. As a result of all these changes, simulations now generally display a somewhat stronger demand channel and show nominal effects that are both smaller and with less inertia. The updated model describes an economy that is more reactive to financial shocks other than changes in interest rates, where wage moderation can generate growth and employment if it is followed by price moderation and where fiscal consolidation reduces public deficit and has negative but moderate effects on GDP.
    Keywords: Spanish economy, macroeconometric model
    JEL: E10 E17 E20 E60
    Date: 2014–08

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