Javier Vallés

Understanding the effects of government spending on consumption

Recent evidence on the effect of government spending shocks on consumption cannot be easily reconciled with existing optimizing business cycle models. We extend the standard New Keynesian model to allow for the presence of rule-of-thumb (non-Ricardian) consumers. We show how the interaction of the latter with sticky prices and deficit financing can account for the existing evidence on the effects of government spending

Money in an estimated business cycle model of the euro area

This article examines the role of money in a small-scale dynamic general equilibrium model of the euro zone estimated by maximum likelihood. The model allows for both intertemporal and intratemporal non-separability in preferences. We find, first, that real balances do not affect the marginal utility of consumption. Second, money demand shocks mainly help to forecast real balances while real shocks explain the bulk of price, output and interest rates fluctuations. Third, the calculation of the natural rate of interest reveals that the evolution of the interest rate is mostly accounted for by the real sources of fluctuations.

Intertemporal Substitution and the Liquidity Effect in a Sticky Price Model

The liquidity effect, defined as a decrease in nominal interest rates in response to a monetary expansion, is a major stylized fact of the business cycle. This paper seeks to understand under what conditions such an effect can be explained in a general equilibrium model with sticky prices and capital adjustment costs.

Aggregate investment in a business cycle model with adjustment costs

Abstract This paper explains the observed cyclical variability of aggregate investment and the counter movements with respect to its relative price in the US data using a stochastic growth model with adjustment costs. The exogenous disturbances of the model represent preference shocks, productivity innovations and changes on the relative price between consumption and investment goods. Simulations of the model imply that the volatility of those relative price innovations need to be three to four times larger than the standard Solow residual innovations in order to match the model with the data.

Fiscal Consolidation after the Great Recession: The Role of Composition

We have examined the fiscal consolidation episodes in a group of OECD countries from 2009 to 2014. The range of the estimated short-term fiscal multiplier runs from 1.2% to 2% of GDP, larger than those obtained in more “normal times”, implying that the contractionary effect has been greater in depressed environments. Nevertheless, we have also found that revenue measures have a higher and more persistent real impact than expenditure measures, which is more consistent with the literature and suggests that expenditure cuts are less harmful for the economy than tax hikes

Household Debt and Uncertainty: Private Consumption after the Great Recession

Household debt in many advanced economies has increased significantly since the 1980s and accelerated in the years prior to the Great Recession, resulting in an aggregate reduction of saving rates in the developed economies. Some of those economies are now deleveraging, which may be affecting their recovery. We try to disentangle how these financial developments influence private consumption in a panel of OECD countries, after controlling for the traditional determinants (income, net financial and non-financial wealth, and interest rates). Consistent with the changes in the distribution of financial constraints, we find that aggregate consumption is also driven by the dynamics of housing debt accumulation and deleveraging. Precautionary savings, due to labour income uncertainty, have also influenced household decisions especially, during the 2007-2009 period.

The global real interest rate: past developments and outlook

There is ample evidence that real interest rates have progressively declined and converged since the 1980s in most advanced and emerging economies, to stand currently at very low levels. The persistence of this trend and its intensification during the global financial crisis have raised a series of highly relevant issues in different areas. We follow a conceptual framework where global real interest rates are determined by the supply of (saving) and the demand for (investment) loanable funds at the global level. Against this background, this chapter analyses the determinants of this trend from a global perspective highlighting how globalisation and increasing financial integration, contributed to increase the influence of the emerging market economies since the beginning of this century. In the wake of the global financial crisis other factors in place were the subsequent reduction in the propensity to invest, the increase in precautionary saving, the introduction of non-standard monetary policies or the increase in income inequality. Looking forward, this chapter argues that the normalisation of monetary policies, the change in the growth model of certain emerging countries and the socio-demographic and productivity trends would point to a gradual recovery in real interest rates over a medium-term horizon, albeit with a high degree of uncertainty. Over the longer term, this trend may tail off against a background of limited technological progress or a sharper-than-expected decline in investment in the emerging economies.

Model of the Banco de Espana

This book provides a description of the main macroeconomic models used by the European Central Bank and the euro area national central banks (Eurosystem). These models are used to help prepare economic projections and scenario analysis for individual countries and the euro area as a whole.