Fiscal policy and the Spanish business cycle

A main result of the RBC literature is that technological factors drive fluctuations of macroeconomic variables around its long-run growth path. Nevertheless, it has been shown that in some countries fluctuations of some fiscal variables may explain some of the business cycle fluctuations. In this paper I show that a result of this sort can be obtained for the Spanish economy. Specifically, I use both technological and fiscal shocks to reproduce the observed volatility of hours of work to output, hours of work to average productivity, and the negative correlation between hours and average productivity.     

Estimation of the business cycle: A modified Hodrick-Prescott filter

Hodrick-Prescott (HP) filtering of (most often, seasonally adjusted) quarterly series is analysed. Some of the criticism to the filter are adressed. It is seen that, while filtering strongly affects autocorrelations, it has little effect on crosscorrelations. It is argued that the criticism that HP filtering induces a spurious cycle in the series is unwarranted. The filter, however, presents two serious drawbacks: First, poor performance at the end periods, due to the size of the revisions in preliminary estimators, and, second, the amount of noise in the cyclical signal, which seriously disturbs its interpretation. We show how the addition of two model-based features (in particular, applying the filter to the series extended with proper ARIMA forecasts and backcasts, and using as input to the filter the trend-cycle component instead of the seasonally adjusted series) can considerably improve the filter performance. Throughout the discussion, we use a computationally and analytically convenient alternative derivation of the HP filter, and illustrate the results with an example consisting of 4 Spanish economic indicators.     

On the role of money in a business cycle model of a small open economy: The case of Spain

This paper examines the consequences of introducing a cash-in-advance constraint into a small open economy business cycle model for the Spanish case. A business cycle model is built extending Correia, Neves and Rebelo's (1995) small open economy framework and Cooley and Hansen's (1995) monetary economy. Money is introduced through a cash-in-advance constraint. The stochastic simulation of the model and its comparison to Spanish data show that the model is able to mimic i) the Dolado et al. puzzle, that is, the high volatility of private consumption for this economy; ii) the Dunlop-Tarshis observation, i.e., the negative correlation between real wages and hours worked; and iii) some cyclical features of the nominal dimension.     

A comparison between the log-linear and the parameterized expectations methods

This paper compares the performance of a log-linear method and a parameterized expectations method in solving a dynamic general equilibrium endogenous growth model with human capital. Quantitative evaluation based on second moment statistics shows that the results provided by the two numerical methods are very similar in this framework whenever the propagation mechanism of technology shocks is weak. However, the cross correlations of some relevant variables in the RBC literature obtained from the two methods are significantly different when the model exhibits a strong propagation mechanism. The parameterized expectations method captures the sensitiviness of second moment statistics to the curvature of the utility function while the log-linear method does not.     

Monetary business cycle accounting

This paper investigates the quantitative importance of various types of distortions for inflation and nominal interest rate dynamics by extending business cycle accounting to monetary models. Representing various classes of real and nominal distortions as ‘wedges’ in standard equilibrium conditions allows a quantitative assessment of those distortions. Decomposing the data into movements due to these wedges shows that distortions generating movements in TFP and wedges in equilibrium conditions for asset markets are essential. In contrast, wedges capturing the effects of sticky prices play less important role. These results are robust to alternative implementations of the accounting method.     

Legal form and risk exposure in Spanish firms

Abstract. It is well-known that the legal form adopted by a firm determines the type of legal responsibility borne by its owners in case of bankruptcy. In this paper we argue that a firm under a limited liability status should be characterized by a higher than average bankruptcy probability, which ultimately captures their risk exposure when output is affected by exogenous shocks. To test this prediction we extend Lee's (1976) switching regressions model to a panel dataset of 1313 Spanish firms from 1990–1994, separating them into corporate and entrepreneurial forms (with/without limited liability, respectively). We consider both random effects and fixed effects panel data models, taking into account the potential endogeneity between risk exposure and the legal form choice. Our results confirm the hypothesis that firms under limited liability have significant higher risk exposure than firms under unlimited liability. The authors gratefully acknowledge valuable suggestions from Maite Martínez-Granado, A. Jorge Padilla, Javier Suárez and two anonymous referees. Data and financial support provided by the Fundación Empresa Pública (Madrid) and comments from participants at seminars held at CEMFI, Simposio de Análisis Económico and Universidad de Vigo are also sincerely appreciated. Mr. Campos particularly acknowledges research funding by the University of Las Palmas.     

Tracking the US business cycle with a singular spectrum analysis

In this paper we resort to singular spectrum analysis to disentangle the US GDP into several underlying components of interest. The business cycle indicator yielded through this method is shown to bear a resemblance with band-pass filtered output, and our results suggest it possesses better revision performance than other commonly applied filters.     

Technology shocks, structural breaks and the effects on the business cycle

It is shown that time-series of US productivity and hours are apparently affected by a structural break in the late 60s. Moreover, the importance of technology shocks over the business cycle has sharply decreased after the break.     

An empirical investigation of the effect of borrowing constraints on Spanish consumption

Abstract. This work analyses the relevance of borrowing constraints on the intertemporal behaviour of Spanish non-durable consumption. We estimate Euler equations with cohort data extracted from the “Encuesta Continua de Presupuestos Familiares” (ECPF) for the period 1985–1993. The results are robust to the use of different estimators to eliminate fixed individual effects, to different specifications of the model, to the effect of uncertainty and to the presence of habits in consumption. Our results allow us to conclude that non-durable consumption of a considerable fraction of the Spanish population is affected by borrowing constraints. At the same time, and in accordance with similar results for other countries, we confirm that borrowing constraints are especially important for the young. The author acknowledges the grant received from the Conselleria de Cultura, Educación y Ciencia de la Generalitat Valènciana, as part of its grant's programme for stays in foreign universities and the financial support by DGICYT grants SEC99-0820 and SEC 2002-00667. The author also acknowledges the hospitality of the Department of Economics at University College London (UCL) and of the Departamento de Análisis Económico de la Universidad Nacional de Educación a Distancia. This work has been presented in the XXV Simposio de Análisis Económico, held in Bellaterra (Spain) in December 2000. Finally, the author acknowledges comments by J. E. Boscá and two anonymous referees that have contributed to improving the final version of the paper.     

Internal and external exchange rate equilibrium in a cointegration framework. An application to the Spanish peseta

A simple cointegration methodology is used to compute the equilibrium real exchange rate for the peseta. The stock of foreign assets and the evolution of sectoral prices are considered to be the fundamentals for the real exchange rate. After testing for cointegration, we proceed to decompose the series into a permanent and a transitory component, following the method devised by Gonzalo and Granger. The permanent component of the real exchange rate corresponds to its (time-varying) equilibrium value, and the deviation of the actual real exchange rate from this equilibrium value gives an estimation of the degree of misalignment of the real exchange rate. By the end of the sample (1998:1), the peseta is estimated to be undervalued around 6%.     

Sunspot fluctuations in dynamics with predetermined variables

Summary. In this paper, I study the existence of Sunspot Equilibria in a general framework whose dynamics allow for the presence of predetermined variables in the system. The main motivation for this research comes from the fact that previous studies did not allow for such predetermined variables which, nevertheless, appear quite naturally in economic models. I show, for a non-negligible subset of dynamics with predetermined variables verifying usual assumptions, the existence of Stationary Sunspot Equilibria fluctuating between an arbitrary finite number of states arbitrarily close to a steady state. Received: March 1, 1995; revised version September 18, 1996     

The business cycle in a financially deregulated context: Theory and evidence

This article proposes Minsky's financial instability hypothesis (FIH) as a theoretical underpinning for a three‐regime business cycles model. Further, it is argued that the development of the FIH for open, developing economies (FIH‐ODE) provides a better understanding of the performance of business cycles in these economies, particularly during the last two decades. In support of these claims, a three‐regime autoregressive Markov switching model is estimated from 1980q1 to 2000q4 to Mexico's quarterly real GDP to investigate its business cycle behaviour. The estimated probabilities of the high and medium growth regimes suggest, for example, that after the financial liberalisation programme was fully launched, in the late 1980s, the economy shifted from the regime of medium to high growth (and vice versa) swiftly, reflecting its dependence on capital flows. Furthermore, the estimated parameters indicate that the average length of the business cycle has not changed.     

A business cycle model with variable capacity utilization and demand disturbances

We develop a dynamic general-equilibrium model with demand (preference) shocks, estimated using Hall's (J. Labour Economics 15 (1997) 223) residual, that replicates U.S. business cycles well, at least compared to the real business cycle models. The key factor is cyclical capital utilization, which is based on imperfect competition, slow adjustments in capital stock, and fixed requirement of labor input. We also demonstrate theoretically that a representative-agent economy with preference shocks could be viewed as the reduced form of a heterogeneous-agents economy with incomplete markets. Specifically, a heterogeneous-agents economy with incomplete markets is aggregated into a representative-agent economy with preference shocks. This result would provide a microeconomic foundation for preference shock models. It is also shown that a shock to marginal utility of consumption and a shock to marginal disutility of labor have different effects.     

Non-neutral responses to money supply shocks when consumption and leisure are Pareto substitutes

Summary. To a greater extent than is often stressed in existing literature, preference assumptions affect responses to money shocks in equilibrium monetary models. Temporary money shocks can have persistent real effects if the marginal utility of leisure is a decreasing function of consumption, where leisure is measured as time endowment less market labor effort, and consumption refers to market produced goods. This condition is an empirically supported implication of home production models. Though not theoretically necessary for supporting the existence of short run real effects, the presence of distortionary taxes and endogenous productivity can have significant quantitative effects on responses to temporary money supply shocks. Received: August 21, 1996; revised version: February 3, 1997     

A revealed preference test of rationing

This paper derives a revealed preference test for utility maximization under rationing and can detect, for which goods rationing is binding without specifying a functional form or imposing rationing constraints prior to estimation. For UK data from 1920–55, we find evidence of utility maximization under rationing with rationing binding for food and other services. Estimated virtual prices exceed observed food prices by 16.5% in 1947 and observed prices of other services by 10.9% in 1952.     

A model with endogenously determined cycles, discounting and growth

Summary. This article reexamines the role of consumption in growth and emphasises the external effects of aggregate consumption, viewed as consumption standards, as an additional impediment in the growth process. These external effects raise the productivity of the individuals and are positively related to their valuation of the future. Conditions are established under which this results in a marginal value of wealth that is an increasing function of consumption. This brings new types of multiple steady states, local indeterminacies and cyclical motions. Imposing extra homogeneity restrictions, balanced growth solutions with endogenous impatience emerge. The possibility of multiple convergent paths is univocally related to endogenous discount effects. A comparison with a benchmark planning economy indicates an excessive value for the rate of time preference and emphasises its insufficient adaptation to future utility in a stationary setting. Discrepancies along the transition path that rest on endogenous impatience versus fixed discount appear in a non-stationary environment when the competitive balanced growth solution is indeterminate. Received: May 5, 1996; revised version: May 19, 1997     

German business cycle forecasts, asymmetric loss and financial variables

We examine the efficiency of German forecasts for output growth and inflation allowing for an asymmetric loss function of the forecasters. We find the loss of output growth forecasts to be approximately symmetric while there is an asymmetry in the loss of the inflation forecasts. The information of financial variables seems to be adequately incorporated into the output forecasts but to a lesser extent into the inflation forecasts.     

Does seasonality change over the business cycle? An investigation using monthly industrial production series

This paper examines the proposition that the business cycle affects seasonality in industrial production, with output being switched to the traditionally low production summer months when recent (annual) growth has been strong. This is investigated through the use of a restricted threshold autoregressive model for the monthly growth rate in a total of 74 industries in 16 OECD countries. Approximately one-third of the series exhibit significant nonlinearity, with this nonlinearity predominantly associated with changes in the seasonal pattern. Estimates show that the summer slowdown in many European countries is substantially reduced in the regime of higher recent growth.     

The contribution of domestic, regional and international factors to Latin America's business cycle

This paper quantifies the relative contribution of domestic, regional and international factors to the fluctuation of domestic output in six key Latin American (LA) countries: Argentina, Bolivia, Brazil, Chile, Mexico and Peru. Using quarterly data over the period 1980:1-2003:4, a multi-variate, multi-country time series model was estimated to study the economic interdependence among LA countries and, in addition, between each of them and the three world largest industrial economies: the US, the Euro Area and Japan. Falsifying a common suspicion, it is shown that the proportion of LA countries' domestic output variability explained by industrial countries' factors is modest. By contrast, domestic and regional factors account for the main share of output variability at all simulation horizons. The implications for the choice of the exchange rate regime are also discussed.