spain in the euro: a general equilibrium analysis€¦ · peseta example of a 2009-2010 forecast...

Spain in the Euro: a General Equilibrium Analysis

Javier Andrés (University of Valencia), Samuel Hurtado, Eva Ortegaand Carlos Thomas (Bank of Spain)

Central Bank Macroeconomic Modelling WorkshopBank of Israel, 28-29 October 2009

Andrés, Hurtado, Ortega, Thomas () Spain in the Euro: a GE AnalysisCentral Bank Macroeconomic Modelling Workshop Bank of Israel, 28-29 October 2009 1

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The Bank of Spain DSGE model

BEMOD: DSGE model developed at the Bank of Spain (Andrés,Burriel and Estrada, 2006, Bank of Spain WP)

First DSGE model of the Eurosystem to incorporate a multi-country(Spain + rest of Euro Area) and multi-sector (non-tradables,tradables and durables) structure

Estimated version published (Investigaciones Económicas, 2009) andused in simulation exercises, e.g. e¤ects of oil price shocks

Also used as a validation tool in the regular quarterly forecastingexercises: estimation of shocks behind baseline macroeconomicforecasts

Rich tool for the analysis of the Spanish economy inside EMU


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This talk

This talk: BEMOD-based analysis of Spain�s macroeconomic�uctuations (relative to rest of EMU) since the creation of the euro

Results: estimated model attributes �uctuations in GDP growth andCPI in�ation di¤erentials to a combination of

Asymmetric country-speci�c shocks (demand and productivity shocksfor GDP, cost-push shocks for CPI)Asymmetric economic structure (lower nominal rigidities in Spain butmore wage indexation)

Results imply: Di¤erent stabilization needs for Spain and the rest ofEMU -> counter-factual simulations from a version of BEMOD withpeseta

Example of a 2009-2010 forecast validation exercise


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Model structure

3 country blocks: Spain (H), Rest of Euro Area (F) and Rest of theWorld (W; exogenous)

4 types of agents in H and F:1 Representative household:

Supplies labor and rents physical capital to �rmsPurchases consumption basket, invests in productive capital and indurable goods, buys nominal bonds (euro- and dollar-denominated)

2 Firms:

3 sectors: tradables, non-tradables, durables3 inputs in each sector: labor, capital and oil

3 Fiscal authority: collects taxes, consumes a fraction of country�s outputand issues nominal government bonds

4 Monetary authority (common to H and F): sets short-run nominalinterest rates (Taylor rule)


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Frictions

Nominal frictions:

Goods markets: monopolistic competition, Calvo price-setting andindexation to sectoral de�atorLabor markets: monopolistic competition, Calvo wage-setting andindexation to CPI

Real frictions:

Investment adjustment costsAdjustment costs in importsVariable capital utilizationHabit formation


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Shocks

7 country-speci�c shocks (Spain & rest of EMU):

Technology: sectoral TFP (tradables, non-tradables), andinvestment-speci�cPreferences: impatience to consumePrice and wage mark-upsGovernment expenditure

3 shocks common to Spain and Rest of EMU: TFP,di¤erence-stationary technology and nominal interest rate

4 shocks to Rest of the World: oil price, nominal interest rate, worldprices and demand

Total: 21 shocks


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Some log-linearized equations

Sectoral de�ator in�ation in sector S,

�St � �S�St�1 =�1� �S

� �1� ��S

��S

�mcSt + u

Pt

�+ �Et

��St+1 � �S�St

�mcSt = wt �mplt:

wt = �Wt � �CPIt + wt�1:

Wage in�ation,

�Wt ��W�CPIt�1 =

�1� �W

� �1� ��W

��W (1 + "W �)

�mrst + u

Wt

�+�Et

��Wt+1 � �W�CPIt

��S ; �S : Calvo and indexation parameters in sector S;�W ; �W : Calvo and indexation parameters for nominal wages


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Some log-linearized equations (2)

Taylor rule for the nominal interest rate,

Rt = �RRt�1 + (1� �R)��0:1�CPIt + 0:9F�CPIt

�+�y (0:1�vat + 0:9�Fvat)

�+ "Rt :

�� > 1, �CPIt : CPI in�ation, �vat: value added growth, "Rt � iid.

Spain has a low weight (10%) on ECB monetary policy decisions.


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Model parameterization

Bayesian estimation of:

Shock parameters (autocorrelation and standard deviation)Calvo and indexation parameters: prices (tradables and non-tradables)and wagesTaylor rule coe¢ cientsInvestment adjustment costs

Calibration of remaining parameters, including

Preferences: discount factor, elasticities of substitution (inter- andintra-temporal), labor supply elasticity, habitsTechnology: factor shares, elasticities of substitution, variable capitalutilizationDepreciation rates for productive capital and stock of durablesSteady-state ratios (share of non-tradables in consumption, etc.)


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Calibration

H / F country Description� 0.99 discount factor�; �D 1 inter-temporal ES (consumption, durables) 0.85 habits'�1 1 labor supply elasticity�; �T 0.5 intra-temporal ES!CN 0.47 / 0.58 weight of non-tradables in consumption!CTH 0.46 / 0.43 weight of home goods in tradables consumption!CTF 0.33 / 0.08 weight of RW goods in tradables consumption�; �D 0.021, 0.005 depreciation rates (capital, durables)�T 0.34 / 0.15 capital share in tradables�N 0.21 / 0.22 capital share in non-tradables�D 0.14 / 0.05 capital share in durables


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Bayesian estimation: data

Quarterly data, 1997Q1-2007Q4

17 observable variables:

Spain (8): consumption, productive investment, value added,employment in tradables and non-tradables, year-on-year CPI in�ation,real wages, exportsRest of Euro Area (7): same variables except for exportsEuro nominal interest rateWorld nominal interest rate

Non-stationary series (consumption, investment, etc.) in demeanedgrowth rates

Stationary series (in�ation and interest rates) are demeaned


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Parameter estimates

Prior Prior mean Posterior modeParameter dist. Spain Rest EMU Spain Rest EMU

Calvo tradables Beta 0.75 0.75 0.69 0.83Calvo non-tradables Beta 0.83 0.80 0.90 0.93Calvo, wages Beta 0.75 0.75 0.61 0.69indexation, tradables Beta 0.30 0.30 0.09 0.24indexation, non-tradables Beta 0.40 0.40 0.27 0.35indexation, wages Beta 0.75 0.25 0.77 0.16invest. adjustment cost Normal 4 4 1.07 3.44Taylor rule, in�ation Normal 1.5 1.51Taylor rule, output growth Normal 0.5 0.44Taylor rule, smoothing Beta 0.9 0.83


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Prior vs. posterior distributions: Calvo parameters


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Prior vs. posterior distributions: indexation parameters


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Prior vs. posterior distributions: Taylor rule coe¢ cients


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Shock to Euro Area nominal interest rate

EMU - nominal interest rate EMU - private consumption EMU - private productive investment

Spain - total exports Spain - private consumption Spain - private productive investment

Spain - tradable production Spain - non-tradable production Spain - total employment

0

0,1

0,2

0,3

0,4

0,5

-1,6-1,4-1,2

-1-0,8-0,6-0,4-0,2

0

-5

-4

-3

-2

-1

0

1

-1,2

-1

-0,8

-0,6

-0,4

-0,2

0

-1,4

-1,2

-1

-0,8

-0,6

-0,4

-0,2

0

-2,5

-2

-1,5

-1

-0,5

0

-8

-6

-4

-2

0

2f

-15

-10

-5

0

5

-3-2,5

-2-1,5

-1-0,5

00,5

1


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Sources of growth and in�ation di¤erentials

What have been the determinants of GDP growth and CPI in�ationdi¤erentials between Spain and the rest of EMU?

Given the infered historical shocks, compute the contribution of eachtype of shock to observed GDP growth and CPI in�ation in the twoeconomies


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Decomposition of GDP growth di¤erentials

EMU - value added growth

ES - value added growth

-12,0

-10,0

-8,0

-6,0

-4,0

-2,0

0,0

2,0

4,0

6,0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Rest of the world

Common real shocks

Interest rates

EMU - prices and wages

EMU - productivity

EMU - public demand

EMU - private demand

ES - prices and wages

ES - productivity

ES - demand (private and public)

Carry-over

EMU - working age population


-12,0

-10,0

-8,0

-6,0

-4,0

-2,0

0,0

2,0

4,0

6,0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Rest of the world

Common real shocks

Interest rates


EMU - productivity

EMU - demand (private and public)


ES - productivity

ES - public demand

ES - private demand

Carry-over

ES - working age population



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Decomposition of CPI in�ation di¤erentials

EMU - private consumption inflation

ES - private consumption inflation


-6,0-5,0-4,0-3,0-2,0-1,00,01,02,03,04,05,0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Rest of the world

Common real shocks

Interest rates


EMU - productivity



ES - productivity


Carry-over


-6,0-5,0-4,0-3,0-2,0-1,00,01,02,03,04,05,0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Rest of the world

Common real shocks

Interest rates


EMU - productivity



ES - productivity


Carry-over



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Decomposition of Spain-EMU di¤erentials

Country-speci�c shocks have played a key role in growth and in�ationdevelopments in the two economies

Common shocks (rest of the World, EMU-wide) are also keydeterminants but have di¤erent impacts across countries ) must bedue to asymmetries in the economic structure:

lower nominal inertia in Spain

but more wage indexation: second-round e¤ects amplify �uctuations inSpanish CPI in�ationlower real rigidities in investment than rest of Eurozonemore oil dependency in Spanish production and CPI


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lower nominal inertia in Spainbut more wage indexation: second-round e¤ects amplify �uctuations inSpanish CPI in�ation

lower real rigidities in investment than rest of Eurozonemore oil dependency in Spanish production and CPI


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lower nominal inertia in Spainbut more wage indexation: second-round e¤ects amplify �uctuations inSpanish CPI in�ationlower real rigidities in investment than rest of Eurozone

more oil dependency in Spanish production and CPI


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lower nominal inertia in Spainbut more wage indexation: second-round e¤ects amplify �uctuations inSpanish CPI in�ationlower real rigidities in investment than rest of Eurozonemore oil dependency in Spanish production and CPI


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Implications for monetary policy

Asymmetries in shocks and structure => di¤erent stabilization needsat certain periods between Spain and the rest of EMU, but only onemonetary policy (in which Spain plays small role).

Build a version of BEMOD in which Spain retains the peseta andBanco de España has its own interest rate rule (same coe¢ cients asin estimated model, but national targets)

Compute di¤erentials in this version, given estimated structuralparameters and historical shocks

Compare with actual di¤erentials


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Actual vs counterfactual di¤erentials: independentmonetary policy

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008-0.02

-0.01

0

0.01

0.02GDP growth differential

datacounterfactual

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008-0.01

-0.005

0

0.005

0.01CPI inflation differential


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2001 2002 2003 2004 2005 2006 2007 20082

2.5

3

3.5

4

4.5

5tipos de interés nominales a 3 meses

tipos del euro, serie históricatipos de la peseta, simulacióntipos del euro, simulación


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At certain dates, Banco de España would have hypotheticallyimplemented di¤erent growth-in�ation combinations. Spanishmonetary policy would have (hypotehtically) been more restrictive in2002-2006.

lower relative in�ation most of the sample and similar or slightly lowerrelative growth

Interest rates in the rest of Eurozone almost unchanged: Spain barelya¤ected EMU monetary policy

Re�ects endogenous response to di¤erent stabilization needs

Caveats: BEMOD does not include the credibility etc. bene�ts ofEMU membership for Spain, neither the costs of changing regime.


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Validation of baseline macroeconomic forecasts

shock de preferencias shock de preferencias - UEM shock de demanda mundial

-0,06

-0,04

-0,02

0

0,02

0,04

0,06

2002 2003 2004 2005 2006 2007 2008 2009 2010

-0,02

-0,015

-0,01

-0,005

0

0,005

0,01

2002 2003 2004 2005 2006 2007 2008 2009 2010

-0,6

-0,4

-0,2

0

0,2

0,4

2002 2003 2004 2005 2006 2007 2008 2009 2010

shock de gasto público shock de gasto público - UEM shock de tipos de interés

-0,05

0

0,05

0,1

0,15

2002 2003 2004 2005 2006 2007 2008 2009 2010

-0,1

-0,05

0

0,05

0,1

0,15

2002 2003 2004 2005 2006 2007 2008 2009 2010

-0,004-0,003-0,002-0,001

00,0010,0020,0030,004

2002 2003 2004 2005 2006 2007 2008 2009 2010


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-12,0

-10,0

-8,0

-6,0

-4,0

-2,0

0,0

2,0

4,0

6,0

2003 2004 2005 2006 2007 2008 2009 2010

Rest of the world

Common real shocks

Interest rates


EMU - productivity

EMU - public demand

EMU - private demand


ES - productivity


Carry-over

EMU - working age population


-12,0

-10,0

-8,0

-6,0

-4,0

-2,0

0,0

2,0

4,0

6,0

2003 2004 2005 2006 2007 2008 2009 2010

Rest of the world

Common real shocks

Interest rates


EMU - productivity



ES - productivity

ES - public demand

ES - private demand

Carry-over

ES - working age population

ES - value added growthAndrés, Hurtado, Ortega, Thomas () Spain in the Euro: a GE AnalysisCentral Bank Macroeconomic Modelling Workshop Bank of Israel, 28-29 October 2009 26

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Conclusions

We have analyzed Spain�s macroeconomic �uctuations (relative toEMU) during the �rst 10 years of Euro membership...

... through the lens of an estimated version of the Banco de EspañaDSGE model (BEMOD)

Di¤erentials in CPI in�ation and GDP growth have been persistentand volatile

We have found a relevant role for both

asymmetries in country-speci�c shocks (demand, productivity, priceand wage mark-ups), andasymmetries in economic structure (nominal and real rigidities)

An independent monetary authority would have hypotheticallypursued di¤erent output-in�ation trade-o¤s at certain times

Through the lens of BEMOD, the current recession in Spain had aninternational and EMU-wide origin but has been reinforced by adepressed domestic demand despite the �scal stimulus.


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Figure: Structure of production in each country

Stage I

Stage II

Stage III

O k n

YN YT

IT

YD

IN cTcN

IH FIHcH FcH WcHWIH

IP

XF XW

I c g X

M

cF IF IWcW

MF MW

cOil

g

ID

Stage I

Stage II

Stage III

O k n

YN YT

IT

YD

IN cTcN

IH FIHcH FcH WcHWIH

IP

XF XW

I c g X

M

cF IF IWcW

MF MW

cOil

g

ID

Stage I

Stage II

Stage III

O k n

YN YT

IT

YD

IN cTcN

IH FIHcH FcH WcHWIH

IP

XF XW

I c g X

M

cF IF IWcW

MF MW

cOil

g

ID

O k n

YN YT

IT

YD

IN cTcN

IH FIHcH FcH WcHWIH

IP

XF XW

I c g X

M

cF IF IWcW

MF MW

cOil

g

ID


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Goodness of �t

Data vs one-period-ahead forecast (Kalman �lter)

Spain - CPI inflation - year-on-year growth rate EMU - CPI inflation - year-on-year growth rate

Spain - value added - quarterly growth rate EMU - value added - quarterly growth rate

-0,025-0,02

-0,015-0,01

-0,0050

0,0050,01

0,015

1997 1999 2001 2003 2005 2007

-0,015

-0,01

-0,005

0

0,005

0,01

0,015

1997 1999 2001 2003 2005 2007-0,01

-0,005

0

0,005

0,01

1997 1999 2001 2003 2005 2007

-0,015

-0,01

-0,005

0

0,005

0,01

0,015

1997 1999 2001 2003 2005 2007


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shock al crecimiento común de largo plazo shock de precio del petró leo

-0,008

-0,006

-0,004

-0,002

0

0,002

0,004

2002 2003 2004 2005 2006 2007 2008 2009 2010

-0,4-0,3-0,2-0,1

00,10,20,3

2002 2003 2004 2005 2006 2007 2008 2009 2010

shock so bre los salarios shock sobre los salarios - UEM

-0,6

-0,4

-0,2

0

0,2

0,4

0,6

2002 2003 2004 2005 2006 2007 2008 2009 2010

-0,4-0,3-0,2-0,1

00,10,20,3

2002 2003 2004 2005 2006 2007 2008 2009 2010

shock de productividad en no comerciables shock de productividad en no comerciables - UEM

-0,3

-0,2

-0,1

0

0,1

0,2

0,3

2002 2003 2004 2005 2006 2007 2008 2009 2010

-0,2-0,15-0,1

-0,050

0,050,1

0,150,2

2002 2003 2004 2005 2006 2007 2008 2009 2010


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-7,0-6,0-5,0-4,0-3,0-2,0-1,00,01,02,03,04,05,0

2003 2004 2005 2006 2007 2008 2009 2010

Rest of the world

Common real shocks

Interest rates


EMU - productivity



ES - productivity


Carry-over


-7,0-6,0-5,0-4,0-3,0-2,0-1,00,01,02,03,04,05,0

2003 2004 2005 2006 2007 2008 2009 2010

Rest of the world

Common real shocks

Interest rates


EMU - productivity



ES - productivity


Carry-over



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spain in the euro: a general equilibrium analysis€¦ · peseta example of a 2009-2010 forecast...

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