Download Ágnes Csermely Magyar Nemzeti Bank

Javier Andres - Samuel Hurtado - Eva
Ortega - Carlos Thomas: Spain in the
Euro: A General Equlibrium Analysis
Ágnes Csermely
Magyar Nemzeti Bank
Scope of the paper
•
Spain and the rest of the Euro Area differ in terms
of growth and inflation performance
Both average growth and average inflation are
higher in Spain
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–
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Well-documented finding in the growth literature
(convergence in income → convergence in prices)
Also: cyclical performances are different
Focus of this paper: What are the sources of
cyclical differences?
Aim of the project
• To make use of BEMOD (Banco de Espana DSGE
model)
• To understand the sources of cyclical growth and
inflation differentials
– Asymmetric country-specific shocks vs.
asymmetric economic structure
– Effect of EMU membership on differentials
Main results
• Estimation reveals sizeable idiosyncratic shocks +
differences in structural parameters
• Cyclical (demeaned) growth differentials stem
mostly from idiosyncratic shocks
• Cyclical (demeaned) inflation differentials reflect
both idiosyncratic shocks and asymmetric
economic structure
– Common shocks (i.e. oil prices) have different effects
due to structural asymmetries
• Independent monetary policy could have reduced
cyclical differentials
Why do we want to know the
sources of differentials?
• Should they be reduced?
– Optimal currency area arguments suggest yes
• Can we reduce them?
– Yes, if they come from Spain-specific policy shocks or
Spain-specific regulations
• Are they dying out naturally in the convergence
process?
– Yes, if they come from differences in structural
parameters that we believe to be related to initial
conditions (more flexibility in price setting may reflect
the higher inflation environment?)
Structural interpretation
• "They [DSGE models] have become popular [...]
because the sources of fluctuations have clear
structural interpretation."
• Good news. But: do they really?
• Some puzzling results:
– Spain-specific mark-up shocks explain the bulk of CPI
inflation in Spain and inflation differential to the Euro
Area.
– Most important shocks are those related to price and
wage setting (cost-push shocks).
– Nominal phenomena are explained residually?
More story-telling is most welcome
•
Policymakers often find DSGE models too technical,
analysis could rely more on intuition (story-telling) .
A DSGE statement: "A clear example is the year
2001, where the rest-of-the-World shocks had a
positive effect on Spanish inflation but a negative
effect on rest-of-EMU inflation."
A policymaker question: what exactly happened in
2001?
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•
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–
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Was it rising oil prices (and Spain having a larger share of oil in
production/consumption)?
Was it euro appreciation (and rest-of-EMU having of larger share of
ROW-imports)?
Was it US recession (and rest-of-EMU being more relied on trade with
the US)?
Trend or cycle?
•
There is a clear positive average growth and
inflation differential
•
We have reasons to believe that the differentials are
non-stationary
–
•
A neoclassical convergence story would imply
diminishing trend for differentials
Is simple demeaning the right way to stationarize
the data?
Predominant role for the supply-side
•
Very rich setup with emphasis on supply-side
effects
–
The 21 structural shocks are mostly related to country-, sector- or
investment-specific technologies
•
Demand-side effects are not very sophisticated
–
Ricardian fiscal policy shock
–
Time preference shock
•
If we are interested in the short run (cyclical
properties), a more detailed view on the AD side
would come useful
–
Non-Ricardian fiscal policy, relative preference shocks, and some
financial intermediation ("domestic risk premium")
Normative implications
• Independent monetary policy in Spain would
have reduced both inflation and growth
differentials.
– Common monetary policy is costly in terms of
welfare
• Role of fiscal policy becomes more important in
smoothing out cyclical fluctuations
– This calls for a more detailed and empirically more
relevant view of fiscal policy in the model
Conclusions
• Differentials in growth and inflation persist over
the longer run
• Cyclical component of growth differentials come
mostly from idiosyncratic shocks
– Asymmetric policy measures should be reduced?
• Cyclical component of inflation differentials come
from both idiosyncratic shocks and structural
asymmetries
– With convergence, inflation should (by itself) become
more synchronized?