A real-time disaggregated forecasting model for euro area GDP

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Price setting behaviour in Spain: evidence from micro PPI data

This paper identifies the basic features of price setting behaviour at the producer level in the Spanish economy using a large dataset containing the micro data underlying the construction of the PPI over the period 1991-1999. It explores how these general features are affected by some specific factors (cost structure, degree of competition, demand conditions, government intervention, level of inflation, seasonality, and the practice of using attractive prices) and presents a comparison of price setting practices at the producer and at the consumer level to ascertain whether the retail sector augments or mitigates price stickiness. We find that prices do not change often but do so by a large amount. The cost structure, proxied by the labour share and the relevance of raw materials, and the degree of competition, proxied by import penetration, affect price flexibility. We also find some evidence that producer prices are more flexible than consumer prices. JEL Classification: E31, D40frequency of price changes, price setting, producer prices

Do decreasing hazard functions for price changes make any sense?

A common finding in empirical studies using micro data on consumer and producer prices is that hazard functions for price changes are decreasing. This means that a firm will have a lower probability of changing its price the longer it has kept it unchanged. This result is at odds with standard models of price setting. Here a simple explanation is proposed: decreasing hazards may result from aggregating heterogeneous price setters. We show analytically the form of this heterogeneity effect for the most commonly used pricing rules and find that the aggregate hazard is (nearly always decreasing. Results are illustrated using Spanish producer and consumer price data. We find that a very accurate representation of individual data is obtained by considering just 4 groups of agents: one group of flexible Calvo agents, one group of intermediate Calvo agents and one group of sticky Calvo agents plus an annual Calvo process. JEL Classification: C40, D40, E30hazard function, Heterogeneous Agents, mixture models, price setting models

Explaining cross-industry heterogeneity in price stickiness.

This note explains cross industry heterogeneity in the frequency of price adjustment. We use the quasi-maximum approach of Papke and Wooldridge (1996) to avoid the shortcomings of OLS regressions to analyse frequencies. We pay particular attention to the role of costs and market competition in explaining cross-industry differences. We find that prices are stickier the higher the labour cost share and the lower are competition and the intermediate input share.producer prices, frequency of price changes, market competition, cost structure

MEDEA: A DSGE Model for the Spanish Economy

In this paper, we provide a brief introduction to a new macroeconometric model of the Spanish economy named MEDEA (Modelo de Equilibrio Dinámico de la Economía EspañolA). MEDEA is a dynamic stochastic general equilibrium (DSGE) model that aims to describe the main features of the Spanish economy for policy analysis, counterfactual exercises, and forecasting. MEDEA is built in the tradition of New Keynesian models with real and nominal rigidities, but it also incorporates aspects such as a small open economy framework, an outside monetary authority such as the ECB, and population growth, factors that are important in accounting for aggregate fluctuations in Spain. The model is estimated with Bayesian techniques and data from the last two decades. Beyond describing the properties of the model, we perform different exercises to illustrate the potential of MEDEA, including historical decompositions, long-run and short-run simulations, and counterfactual experiments.DSGE Models, Likelihood Estimation, Bayesian Methods

Uncovering the heterogeneous effects of ECB unconventional monetary policies across euro area countries

En este documento se evalúa el efecto de las medidas no convencionales de política monetaria adoptadas recientemente por el BCE por medio de un modelo VAR Global que explota la variación existente entre las variables de las economías que conforman el área del euro y tiene en cuenta de forma explícita las interdependencias entre países. La estimación del modelo muestra que las medidas de política monetaria no convencional tienen efectos positivos sobre la actividad, el crédito, la inflación y el precio de los activos, y producen una depreciación del tipo de cambio. La mayoría de los países miembros se benefician de estas medidas, pero existe un elevado grado de heterogeneidad. Una parte muy significativa de esta heterogeneidad se explica por las interacciones entre las economías del área del euro, recogidas explícitamente en nuestro modelo, que a su vez amplifican sustancialmente los efectos estimados. Si se compara con la política monetaria convencional (expansiva), las medidas de carácter no convencional parecen ser más efectivas en la coyuntura actual para reducir el coste de financiación de las empresas y potenciar el créditoWe assess the effects of the ECB’s recent unconventional monetary policy measures by estimating a global VAR that exploits panel variation among all euro area economies and explicitly takes into account cross-country interdependencies. Unconventional monetary policy measures have beneficial effects on activity, credit, inflation and equity prices, and lead to a depreciation of the exchange rate. Most euro area members benefit from these measures, but with a substantial degree of heterogeneity. Cross-country spillovers account for a sizable fraction of such dispersion, and substantially amplify effects. Countries with less fragile banking systems benefit the most from unconventional monetary policy measures. Compared to expansionary conventional monetary policies, unconventional measures are particularly effective in reducing firms’ financing costs and boosting credi

Debt sustainability and fiscal space in a heterogeneous Monetary Union: normal times vs the zero lower bound

En este documento se estudian los efectos de la política fiscal y el espacio fiscal existente en una unión monetaria compuesta por países con distintos niveles de deuda pública. Desarrollamos un modelo de equilibrio general dinámico y estocástico (DSGE, por sus siglas en inglés) de una unión monetaria de dos países, calibrada a partir de las características de España y Alemania, en el que la sostenibilidad de la deuda pública y su prima de riesgo se determinan de forma endógena según el mecanismo propuesto por Bi (2012). En este modelo, las decisiones de política económica modifican las expectativas de los mercados sobre los superávits futuros afectando directamente a la prima de riesgo soberana y a las respuestas de las principales variables macroeconómicas. En tiempos normales, el coste de una consolidación fiscal basada en una reducción del gasto público en un país miembro de la unión con deuda elevada se ve reducido cuando esta mejora las perspectivas de sostenibilidad de su deuda pública. Una consolidación fiscal simultánea en los dos miembros de la unión reduce aún más los tipos de interés reales, lo que amplifica la caída de la prima de riesgo en el país más endeudado y, pese a reducir la actividad económica del conjunto de la unión en el corto plazo, puede suponer una mejora en el largo plazo. Por el contrario, cuando la política monetaria está restringida por haber alcanzado los tipos de interés nominales su cota inferior (ZLB, por sus siglas en inglés), el canal de la prima de riesgo ve muy reducida su efectividad. En esta situación, una consolidación fiscal genera expectativas deflacionarias que aumentan el tipo de interés real, lo que puede compensar total o parcialmente, según la calibración, los beneficios derivados de la menor prima de riesgo. Así, la estrategia que proporconaría un mayor aumento de la actividad en el conjunto de la unión en el ZLB sería una expansión fiscal en el país menos endeudado y una consolidación en el más endeudado. Finalmente, el canal de prima de riesgo solo afecta de forma indirecta a los miembros de la unión monetaria con un nivel de deuda medio o bajo, a través de los efectos sobre la economía de los miembros con una deuda elevada.In this paper we study fiscal policy effects and fiscal space for countries in a monetary union with different levels of public debt. We develop a dynamic stochastic general equilibrium (DSGE) model of a two-country monetary union, calibrated to match the characteristics of Spain and Germany, in which debt sustainability is endogenously determined a la Bi (2012) to shape the responses of the risk premium on public debt. Policy shocks change the market’s expectation about future primary surplus, producing a direct effect on the sovereign risk premium and macroeconomic responses of the economy. In normal times the costs of a government spending driven fiscal consolidation in the high-debt country are greatly diminished when this consolidation improves endogenously its debt sustainability prospects. Fiscal consolidations in both members of the monetary union decrease real interest rates and amplify the reduction in risk premium in the highly-indebted country, improving union-wide output in the long run, but at the cost of lower output in the lowdebt country in the short term. On the contrary, when monetary policy is constrained at the zero lower bound, the risk premium channel arising from the endogenous determination of debt sustainability becomes muted. In the ZLB, a fiscal consolidation generates deflation expectations which increase the real interest rate and may compensate partially or completely, depending on the calibration, the benefits from a lower risk premium. In this context, a fiscal expansion in the low-debt country and a consolidation in the highdebt country delivers the greater positive impact on union-wide output. Finally, the risk premium channel only affects countries with medium or low levels of public debt indirectly through the negative spillovers from other high-debt members of the monetary union

Micro-based estimates of heterogeneous pricing rule : the United States vs. the Euro Area

This paper presents US and euro area estimates for a fully heterogeneous model, in which there is a continuum of fi rms setting prices with a constant probability of adjustment, which may differ from fi rm to fi rm. The estimated model accurately matches the empirical distribution function of individual price durations for the US and the euro area. Incorporating these micro based pricing rules into a DSGE model, we fi nd that nominal shocks have a greater real impact in the fully heterogeneous economy than in the standard Calvo model. We also fi nd that nominal and real shocks bring about a reallocation of resources among sectors. Monetary policy is found to have a greater real impact in the euro area than in the United State

Matching, education externalities and the location of economic activity.

In this thesis we demonstrate how important the existence of a pool of qualified workers within the local labour market is for the process of job creation and the location of economic activity. In chapter 1 the basic theoretical model is developed. Using a matching model it is shown that Job Creation will be higher if firms have a larger pool of qualified workers from which to fill their vacancies, since their expected profits per vacancy opened will be greater. At the same time, individuals have a higher incentive to invest in education if job creation is higher. The interaction between these two forces generates a pecuniary externality in the labour market. In chapter 2, we extend the theoretical model by considering two regions and the possibility of migration. In equilibrium, areas where the pool of qualified workers is larger attract more jobs and skilled workers. Job Creation will be higher in such areas since firms located there are able to find a more qualified worker with greater ease. At the same time, given the sunk cost of moving, only the most skilled workers will find migration to these areas worthwhile. The interaction between these two forces generates a pecuniary externality that encourages concentration of economic activity in areas with a larger pool of qualified workers. In chapter 3 we estimate the effect of the pecuniary education externality on the process of matching in the UK regional labour market in the 1990s. We find a significant effect of the average level of education in a region on the conditional probability of finding a job in that region using a duration model. This effect is positive for skilled occupations and negative for unskilled ones. Finally, in Chapter 4 we estimate the effect of the education externality on the individual decision to stay-on in education. We find that the share of the region's working age population with degree has a positive and significant effect on the education decisions of sixteen and eighteen year-olds, while the share with high vocational has a similar effect for seventeen year-olds