Francisco de Castro

The macroeconomic effects of fiscal policy in Spain

This paper focuses on the effects of fiscal policy in Spain analysed in a VAR context. Fiscal shocks are found to involve significant effects on GDP, private consumption, private investment, interest rates and prices. Non-Keynesian effects are observed. Moreover, evidence on the channels highlighted in the literature for such effects to arise is found, notably the effects of permanent income on consumption and investment on the demand side, coupled with the response of the equilibrium wage on the supply side affecting entrepreneurial profits and investment. The response of interest rates seems to reinforce both effects. Furthermore, the different readings of spending or taxes do not affect macroeconomic variables homogeneously.

Fiscal Data Revisions in Europe

Public deficit figures are subject to revisions, as most macroeconomic aggregates are. Nevertheless, in the case of Europe, the latter could be particularly worrisome given the role of fiscal data in the functioning of EU’s multilateral surveillance rules. Adherence to such rules is judged upon initial releases of data, in the framework of the so-called Excessive Deficit Procedure (EDP) Notifications. In addition, the lack of reliability of fiscal data may hinder the credibility of fiscal consolidation plans. In this paper we document the empirical properties of revisions to annual government deficit figures in Europe by exploiting the information contained in a pool of real-time vintages of data pertaining to fifteen EU countries over the period 1995-2008. We build up such real-time dataset from official publications. Our main findings are as follows: (i) preliminary deficit data releases are biased and non-efficient predictors of subsequent releases, with later vintages of data tending to show larger deficits on average; (ii) such systematic bias in deficit revisions is a general feature of the sample, and cannot solely be attributed to the behaviour of a small number of countries, even though the Greek case is clearly an outlier; (iii) Methodological improvements and clarifications stemming from Eurostat’s decisions that may lead to data revisions explain a significant share of the bias, providing some evidence of window dressing on the side of individual countries; (iv) expected real GDP growth, political cycles and the strength of fiscal rules also contribute to explain revision patterns; (v) nevertheless, if the systematic bias is excluded, revisions can be considered rational after two years.

On the Sustainability of the Spanish Public Budget Performance

In this paper, we address the issue of whether the current fiscal policy in Spain is sustainable. For this purpose we apply traditional empirical tests of fiscal sustainability proposed in the literature and, in addition, we introduce a deeper univariate analysis of the series involved. Our results show that a structural break seems to have taken place gradually in the Spanish budget performance, allowing to verifying the intertemporal borrowing constraint in a «strong sense», which means that no problems in marketing public debt are expected to arise if fiscal variables follow the pattern of the past in the future. Classification-JEL : E60, F41,

The effects of fiscal shocks on the exchange rate in Spain

We analyse the impact of fiscal shocks on the Spanish effective exchange rate over the period 1981-2008 using a standard structural VAR framework. Government spending brings about positive responses of output and private consumption, jointly with real appreciation and a fall in trade balances. Real appreciation is explained by persistent nominal appreciation and higher relative prices. Accordingly, our results are largely consistent with the predictions of not only the conventional Mundell-Fleming model, but also of a number of New Keynesian models under standard calibrations. Moreover, our estimations are also consistent with the “twin deficits” hypothesis.

Non-Keynesian effects of public expenditure in Spain

Evidence is provided of non-Keynesian effects of fiscal policy in Spain within a VAR framework. Shocks to government expenditure expand activity, although moderately, in the short term, with output multipliers slightly above one. In the medium term, however, the response of output becomes significantly negative. The two main explanations proposed in the literature seem to apply here, namely higher real interest rates as a result of higher risk premia on the demand side and higher equilibrium wage reducing entrepreneurial profits and investment accordingly on the supply side.Evidence is provided of non-Keynesian effects of fiscal policy in Spain within a VAR framework. Shocks to government expenditure expand activity, although moderately, in the short term, with output multipliers slightly above one. In the medium term, however, the response of output becomes significantly negative. The two main explanations proposed in the literature seem to apply here, namely higher real interest rates as a result of higher risk premia on the demand side and higher equilibrium wage reducing entrepreneurial profits and investment accordingly on the supply side.

The Relationship between Public and Private Saving in Spain: Does Ricardian Equivalence Hold?

This paper aims to test the validity of the Ricardian proposition for the Spanish economy from three different approaches: a) by testing its theoretical implications on the stability of national saving and the relationship between fiscal and current account balances, b) by carrying a number of tests on different structural consumption equations and, c) by testing this hypothesis in consumption functions stemming from the Euler equations derived from a consumer’s maximization problem. Our results lean toward rejection of the Ricardian proposition, although some degree of substitution between public and private saving is detected. In terms of policy implications, these results would suggest that there is some room for fiscal policy to exert its countercyclical role in the case of Spain. However, the effectiveness of such a policy might be limited in a context of rising debt ratios that trigger sustainability concerns and make consumers increasingly Ricardian.

Time-varying effects of fiscal policy in Spain: a Markov-switching approach

ABSTRACT How have the effects of Spanish fiscal policy varied over time? Given this starting point, in this article we analyse the regime dependence of fiscal policy in Spain by estimating a vector autoregressive model within a Markov-switching framework. Our results indicate that Spain’s membership of the Economic and Monetary Union (EMU) is the most likely source of time variation in the fiscal outcomes. Accordingly, increases in the primary deficit-to-GDP ratio do not succeed in stimulating economic activity in the first regime; rather, unexpected upsurges in the primary deficit harm economic activity (non-Keynesian effect) in the second regime, which prevails since the ratification of the Maastricht Treaty.

Fiscal Policies in Spain: Main Stylised Facts Revisited

We provide key stylised facts on fiscal policy developments in Spain over the past three decades using quarterly data (1986Q1-2012Q2). First, we compute stylised facts on the cyclical properties of fiscal policies over that period. Next, we report updated evidence on the macroeconomic effects of non-systematic fiscal policies, including updated estimates of their macroeconomic impact (fiscal multipliers) for alternative datasets. To perform the analysis in the paper we built up a comprehensive database of seasonally adjusted quarterly fiscal variables for the period of interest.

Does Ricardian equivalence hold? The relationship between public and private saving in Spain

This paper aims to test the validity of the Ricardian proposition for the Spanish economy in two different frameworks: a) in traditional structural consumption equations and, b)in consumption functions stemming from Euler equations derived from a consumers maximization problem. Our results lean toward rejection of the Ricardian proposition, although some degree of substitution between public and private saving is detected. Moreover, we provide some evidence of consumers becoming increasingly Ricardian with the level of government indebtedness as it may trigger sustainability concerns. In terms of policy implications, these results would suggest that until 2007 fiscal policy in Spain enjoyed some room of manoeuvre to exert its countercyclical role. The sovereign debt crisis has exhausted such margin.

Fiscal Regimes in Spain: A Markov-Switching Approach

The financial and economic crisis has brought back the spotlight to the PIIGS nations. Although Spain belongs to this group, its impressive fiscal efforts made so far have been recognized by investors and economists alike and have begun to bear fruit. In this context, it would be interesting to characterize the behavior of Spanish fiscal policymakers. For this purpose, we estimate fiscal policy rules within a Markov-Switching framework and compare the results obtained for Spain with those computed for the Euro area as an aggregate, using two new quarterly datasets of public finance variables of Spain (De Castro et al., 2014) and the Euro area (Paredes et al., 2014) for the period 1986-2012. Our results distinguish between two different regimes in terms of their relationship to the cycle: in regime 1 fiscal policy would be acyclical, whereas in regime 2 would be countercyclical. Both regimes would be passive (debt-stabilizing), although more intensely in the first regime.