Advertisement

SERIEs

, Volume 1, Issue 1–2, pp 135–169 | Cite as

A rational expectations model for simulation and policy evaluation of the Spanish economy

  • J. E. Boscá
  • A. Díaz
  • R. Doménech
  • J. Ferri
  • E. Pérez
  • L. Puch
Open Access
Original article

Abstract

This paper presents the model used for simulation purposes within the Spanish Ministry of Economic Affairs and Finance. REMS (a Rational Expectations Model for the Spanish economy) is a small open economy dynamic general equilibrium model in the vein of the New-Neoclassical-Keynesian synthesis models, with a strongly micro-founded system of equations. In the long run REMS behaves in accordance with the neoclassical growth model. In the short run, it incorporates nominal, real and financial frictions. Real frictions include adjustment costs in consumption (via habits in consumption and rule-of-thumb households) and investment into physical capital. Due to financial frictions, there is no perfect arbitrage between different types of assets. The model also allows for slow adjustment in wages and price rigidities, which are specified through a Calvo-type Phillips curve. All these modelling choices are fairly in line with other existing models for the Spanish economy. One valuable contribution of REMS to the renewed vintage of D(S)GE models attempting to feature the Spanish economy is the specification of the labour market according to the search paradigm, which is best suited to assess the impact of welfare policies on both the intensive and extensive margins of employment. The model’s most valuable asset is the rigour of the analysis of the transmission channels linking policy action with economic outcomes.

Keywords

General equilibrium Rigidities Policy simulations 

JEL Classification

E24 E32 E62 

Notes

Acknowledgments

This research could have not been accomplished without the unconditional support of Juan Varela. We would like to thank the helpful comments and suggestions of Javier Andrés, Pablo Burriel, Francisco Corrales, Ángel de la Fuente, Víctor Gómez, Luis González-Calbet, Campbel Leith, Ángel Melguizo, Eduardo Pedreira, Álvaro Sanmartín and participants at the workshop on Lisbon methodology organized by the EU Commission and at the XXXII SAE. The work of Andrés de Bustos with the dataset has been invaluable. Financial support from the European Regional Development Fund (ERDF) and Fundación Rafael del Pino is gratefully acknowledged. J. E. Boscá and J. Ferri also thank the financial support by CICYT Grants ECO2008-04669 and ECO2009-09569 and Luis Puch CICYT Grant SEJ2004-04579.

References

  1. Adolfson M, Laséen S, Lindé J, Villani M (2007) Evaluating an estimated new Keynesian small open economy model. Working Paper Series 203. Sveriges RiksbankGoogle Scholar
  2. Álvarez L, Dhyne E, Hoeberichts M, Kwapil C, Le Bihan H, Lünnemann P, Martins F, Sabbatini R, Stahl H, Vermeulen P, Vilmunen J (2006) Sticky prices in the Euro area: a summary of new microevidence. J Eur Econ Assoc 4(2–3): 575–584CrossRefGoogle Scholar
  3. Andolfatto D (1996) Business cycles and labor-market search. Am Econ Rev 86(1): 112–132Google Scholar
  4. Andrés J, Burriel P, Estrada A (2006) BEMOD: a DSGE model for the Spanish economy and the rest of the Euro area. Banco de España Research Paper, No. WP-0631Google Scholar
  5. Andrés J, Doménech R (2006) Automatic stabilizers, fiscal rules and macroeconomic stability. Eur Econ Rev 50(6): 1487–1506CrossRefGoogle Scholar
  6. Andrés J, Doménech R, Fatás A (2008) The stabilizing role of government size. J Econ Dyn Control 32: 571–593CrossRefGoogle Scholar
  7. Benigno P (2001) Price stability with imperfect financial integration. CEPR Discussion Paper No. 2854Google Scholar
  8. Bils M, Klenow P (2004) Some evidence on the importance of sticky prices. J Political Econ 112(5): 947–985CrossRefGoogle Scholar
  9. Blanchard OJ, Galí J (2006) A new Keynesian model with unemployment. MIT Department of Economics Working Paper No. 06-22Google Scholar
  10. Blanchard OJ, Kahn CM (1980) The solution of linear difference models under rational expectations. Econometrica 48: 1305–1311CrossRefGoogle Scholar
  11. Boscá JE, García JR, Taguas D (2005) Tipos Efectivos de Gravamen y Convergencia Fiscal en la OCDE: 1965–2001. Hacienda Pública Española 174(3): 119–141Google Scholar
  12. Boscá JE, Bustos A, Díaz A, Doménech R, Ferri J, Pérez E, Puch L (2007) The REMSDB macroeconomic database of the Spanish economy. Working Paper WP-2007-04. Ministerio de Econom ía y HaciendaGoogle Scholar
  13. Boucekkine R (1995) An alternative methodology for solving non linear forward-looking models. J Econ Dyn Control 19(4): 711–734CrossRefGoogle Scholar
  14. Burnside C, Eichenbaum M, Rebelo S (1993) Labor hoarding and the business cycle. J Political Econ 101(2): 245–273CrossRefGoogle Scholar
  15. Burriel P, Fernández-Villaverde J, Rubio J (2007) MEDEA: a Bayesian DSGE model for the Spanish economy. Economy Bureau of the Prime Minister, SpainGoogle Scholar
  16. Cadiou L, Dées S, Guichard S, Kadareja A, Laffargue JP, Bronka R (2001) Marmotte. A multinational model by CEPII/CEPREMAP. CEPII Working paper No. 2001-15Google Scholar
  17. Calvo G (1983) Staggered prices in a utility maximizing framework. J Monet Econ 12: 383–398CrossRefGoogle Scholar
  18. Carlstrom CT, Fuerst TS (2001) Timing and real indeterminacy in monetary models. J Monet Econ 47: 285–298CrossRefGoogle Scholar
  19. Doménech R, Ledo M, Taguas D (2002) Some new results on interest rate rules in EMU and in the US. J Econ Bus 54(4): 431–446CrossRefGoogle Scholar
  20. Erceg CJ, Guerrieri L, Gust C (2005) Expansionary fiscal shocks and the US trade deficit. Int Finance 8(3): 363–397CrossRefGoogle Scholar
  21. Erceg CJ, Guerrieri L, Gust C (2006) SIGMA: a new open economy model for policy analysis. Int J Central Banking 2(1): 1–50Google Scholar
  22. Fernández-Villaverde J, Rubio-Ramírez J (2009) Una propuesta de política fiscal ante la crisis. In La Crisis de la Economía Española: Lecciones y Propuestas. FEDEA eBookGoogle Scholar
  23. Fujita S (2004) Vacancy Persistence FRB of Philadelphia Working Paper No. 04-23Google Scholar
  24. Galí J (1999) Technology, employment and the business cycle. Do technology shocks explain aggregate fluctuations?. Am Econ Rev 89(1): 249–271CrossRefGoogle Scholar
  25. Galí J, Lopez-Salido JD (2001) Una nueva Curava de Phillips para España. Moneda y Crédito 212: 265–304Google Scholar
  26. Galí J, Rabanal P (2004) Technology shocks and aggregate fluctuations: how well does the RBS model fit postwar U.S. data? NBER Working Paper No. 10636Google Scholar
  27. Galí J, Gertler Galí, Lopez-Salido JD (2001) European inflation dynamics. Eur Econ Rev 45: 1237–1270CrossRefGoogle Scholar
  28. Galí J, Lopez-Salido JD, Vallés J (2007) Understanding the effects of government spending on consumption. J Eur Econ Assoc 5(1): 227–270CrossRefGoogle Scholar
  29. Gramlich EM (1994) Infrastructure investment: a review essay. J Econ Lit 32: 1176–1196Google Scholar
  30. Harrison R, Nikolov K, Quinn M, Ramsay G, Scott A, Thomas R (2005) The Bank of England quarterly model. Bank of EnglandGoogle Scholar
  31. Hosios AJ (1990) On the efficiency of matching and related models of search unemployment. Rev Econ Stud 57: 279–298CrossRefGoogle Scholar
  32. Juillard M (1996) Dynare: a program for the resolution and simulation of dynamic models with forward variables through the use a relaxation algorithm. CEPREMAP Working paper No. 9602Google Scholar
  33. Kilponen J, Ripatti A, Vilmunen J (2004) AINO: the Bank Of Finland’s new dynamic general equilibrium odel of the finnish economy. Bank Finland Bull 3: 71–77Google Scholar
  34. Laffarque JP (1990) Résolution d’un Modèle Macro économique avec Anticipations Rationneles. Ann Econ Stat 17: 97–119Google Scholar
  35. Lindé J, Nessén M, Söderström U (2004) Monetary policy in an estimated open-economy model with imperfect pass-through. Working Paper Series 167, Sveriges RiksbankGoogle Scholar
  36. Merz M (1995) Search in the labor market and the real business cycle. J Monet Econ 36: 269–300CrossRefGoogle Scholar
  37. Molinas C, Ballabriga C, Canadell E, Escribano A, López E, Manzanedo L, Mestre R, Sebastián y M, Taguas D (1990) MOISEES: un modelo de investigación y simulación de la economía española. Antoni Bosch, editorGoogle Scholar
  38. Murchison S, Rennison A, Zhu Z (2004) A structural small open-economy model for Canada. Working Papers 04-4, Bank of CanadaGoogle Scholar
  39. Obstfeld M, Rogoff K (1995) Exchange rate dynamics redux. J Political Econ 103: 624–660CrossRefGoogle Scholar
  40. Obstfeld M, Rogoff K (1996) Foundations of international macroeconomics. MIT Press, CambridgeGoogle Scholar
  41. Pissarides CA (2000) Equilibrium unemployment theory. MIT Press, CambridgeGoogle Scholar
  42. Puch L, Licandro O (1997) Are there any special features in the Spanish business cycle?. Investig Econ XXI 2: 361–394Google Scholar
  43. Ravn MO, Simonelli S (2007) Labor market dynamics and the business cycle: structural evidence for the United States. CSEF Working Papers, 182Google Scholar
  44. Schmitt-Grohe S, Uribe M (2003) Closing small open economy models. J Int Econ 61: 163–185CrossRefGoogle Scholar
  45. Smets F, Wouters R (2003) An estimated dynamic stochastic general equilibrium model of the Euro area. J Eur Econ Assoc 1(5): 1123–1175CrossRefGoogle Scholar
  46. Trigari A (2004) Labour market search, wage bargaining and inflation dynamics. Working Papers 268, IGIERGoogle Scholar
  47. Turnovsky SJ (1985) Domestic and foreign disturbances in an optimizing model of exchange-rate determination. J Int Money Finance 4(1): 151–171CrossRefGoogle Scholar
  48. Woodford M (2003) Interest and prices, foundations of a theory of monetary policy. Princeton University Press, PrincetonGoogle Scholar

Copyright information

© The Author(s) 2010

This article is published under license to BioMed Central Ltd. Open Access This article is distributed under the terms of the Creative Commons Attribution Noncommercial License which permits any noncommercial use, distribution, and reproduction in any medium, provided the original author(s) and source are credited.

Authors and Affiliations

  • J. E. Boscá
    • 1
  • A. Díaz
    • 2
  • R. Doménech
    • 1
    • 3
  • J. Ferri
    • 1
  • E. Pérez
    • 2
  • L. Puch
    • 4
  1. 1.University of ValenciaValenciaSpain
  2. 2.Ministry of Economics and FinanceMadridSpain
  3. 3.Economic Research DepartmentBBVAMadridSpain
  4. 4.FEDEA and ICAE, Universidad ComplutenseMadridSpain

Personalised recommendations