SPAIN IN THE EURO: A GENERAL EQUILIBRIUM ANALYSIS. Javier Andrés, Samuel Hurtado, Eva Ortega and Carlos Thomas. Documentos de Trabajo N.

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1 SPAIN IN THE EURO: A GENERAL EQUILIBRIUM ANALYSIS 29 Javier Andrés, Samuel Hurtado, Eva Ortega and Carlos Thomas Documentos de Trabajo N.º 927

2 SPAIN IN THE EURO: A GENERAL EQUILIBRIUM ANALYSIS

3 SPAIN IN THE EURO: A GENERAL EQUILIBRIUM ANALYSIS (*) Javier Andrés (**) UNIVERSIDAD DE VALENCIA Samuel Hurtado (***), Eva Ortega (****) and Carlos Thomas (*****) BANCO DE ESPAÑA (*) We would like to thank Ángel Estrada, Juan Francisco Jimeno, Nooman Rebei and Alberto Urtasun for their help and very useful suggestions, and to Jesús Vázquez and participants of the conference "Estimation and Empirical Validation of Structural Dynamic Stochastic Models for the Spanish Economy" celebrated at Banco de España on March 13, 29. Javier Andrés acknowledges financial support by CICYT grant ECO This paper represents the views of the authors and should not be reported as representing the views of the Banco de España or the Eurosystem. (**) javier.andres@uv.es. (***) samuel.hurtado@bde.es. (****) eortega@bde.es. (*****) carlos.thomas@deb.es. Documentos de Trabajo. N.º

4 The Working Paper Series seeks to disseminate original research in economics and fi nance. All papers have been anonymously refereed. By publishing these papers, the Banco de España aims to contribute to economic analysis and, in particular, to knowledge of the Spanish economy and its international environment. The opinions and analyses in the Working Paper Series are the responsibility of the authors and, therefore, do not necessarily coincide with those of the Banco de España or the Eurosystem. The Banco de España disseminates its main reports and most of its publications via the INTERNET at the following website: Reproduction for educational and non-commercial purposes is permitted provided that the source is acknowledged. BANCO DE ESPAÑA, Madrid, 29 ISSN: (print) ISSN: (on line) Depósito legal: M Unidad de Publicaciones, Banco de España

5 Abstract This paper analyzes the determinants of Spain s macroeconomic uctuations since the inception of the euro in 1999, with a special attention to observed growth and in ation differentials with respect to the rest of the European Monetary Union (EMU). For that purpose we estimate the Banco de España DSGE model of the Spanish economy and the rest of the Eurosystem (BEMOD). We nd that observed differentials are the result of a combination of asymmetric country-speci c shocks (in particular, demand and productivity shocks for growth and cost-push shocks for in ation) as well as asymmetric economic structure (especially lower nominal wage and price rigidities in Spain). Finally, we nd that EMU membership has had a non-negligible effect on observed differentials. Keywords: DSGE model, monetary union, growth and in ation differentials, Bayesian inference JEL classication: C11, C51, E17.

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7 HICP Inflation differential Spain-EMU 2 1,5 1,5 -,5 jan-99 jan- jan-1 jan-2 jan-3 jan-4 jan-5 jan-6 jan-7 jan-8 jan-9 Average inflation differential since start of EMU GDP growth differential Spain-EMU 2,5 2 1,5 1,5 -,5-1 jan-99 jan- jan-1 jan-2 jan-3 jan-4 jan-5 jan-6 jan-7 jan-8 Average growth differential since start of EMU BANCO DE ESPAÑA 1 DOCUMENTO DE TRABAJO N.º 927

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12 I c g X I D I P Stage III I T I N c N c T g XF XW cf cw c Oil IF IW IH ch FIH FcH WIH WcH Stage II MF MW Y D Y N Y T M O k n Stage I BANCO DE ESPAÑA 15 DOCUMENTO DE TRABAJO N.º 927

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29 ,5,4,3,2,1 -,2 -,4 -,6 -,8-1 -1,2-1,4-1, EMU - nominal interest rate EMU - private consumption EMU - private productive investment 2 f -,2 -,4-2 -,6-4 -, ,2-8 Spain - total exports Spain - private consumption 5 Spain - private productive investment -,2 -,4 -,6-5 -, ,2-1,4-15 Spain - tradable production Spain - non-tradable production Spain - total employment 1,5 -,5-1 -,5-1 -1,5-1, ,5-2,5-3 BANCO DE ESPAÑA 32 DOCUMENTO DE TRABAJO N.º 927

30 ,4,2 -,2 -,4 -,6 -,8 -,1 -,12 Spain - tradable production deflator inflation Spain - tradable production Spain - total value added,1,3 v,25,8,2,6,15,4,1,5,2 -,5 -,2 -,1,1,5 -,5 -,1 -,15 -,2 -,25 -,3 -,35 Spain - CPI inflation EMU - CPI inflation EMU - nominal interest rate,1 -,1 -,2 -,3 -,4 -,5 -,5 -,1 -,15 -,2,1 -,1 -,2 -,3 -,4 -,5 -,6 -,7 Spain - employment of the tradable industry Spain - employment of the non-tradable industry Spain - total employment,1,5 -,1 -,5 -,2 -,1 -,3 -,4 -,15 -,5 -,2 -,6 -,25 BANCO DE ESPAÑA 33 DOCUMENTO DE TRABAJO N.º 927

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36 .2.1 GDP growth differential data counterfactual CPI inflation differential BANCO DE ESPAÑA 39 DOCUMENTO DE TRABAJO N.º 927

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38 .2.1 GDP growth differential data counterfactual x 1-3 CPI inflation differential BANCO DE ESPAÑA 41 DOCUMENTO DE TRABAJO N.º 927

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