María Dolores Gadea

PPP and structural breaks. The peseta–sterling rate, 50 years of a floating regime

Abstract This paper aims to illustrate the relevance of considering structural breaks in Purchasing Power Parity (PPP) tests. To that end, we examine the peseta–sterling real exchange rate between 1870 and 1935. This is an interesting series, given that the peseta was not part of the gold standard yet maintained a floating rate regime during most of that period. When breaks are not considered, it is impossible to reject the existence of a unit root in the series. However, if two breaks are allowed, with these capturing the particular events that occurred in the monetary history of these currencies at the beginning and end of the period, then the null hypothesis can be rejected and PPP emerges as a good approximation of the behavior of the peseta–sterling exchange rate, even if that rate was predominantly a floating regime.

The Great Moderation in Historical Perspective. Is it that Great

The Great Moderation (GM) is widely documented in the literature as one of the most important changes in the US business cycle. All the papers that analyze it use post WWII data. In this paper, for the first time we place the GM in a long historical perspective, stretching back a century and a half, which includes secular changes in the economic structure and a substantial reduction of output volatility. We find two robust structural breaks in volatility at the end of WWII and in the mid-eighties, showing that the GM still holds in the longer perspective. Furthermore, we show that GM volatility reduction is only linked to expansion features. We also date the US business cycle in the long run, finding that volatility plays a primary role in the definition of the business cycle, which has important consequences for econometricians and forecasters.

La sombra monetaria del déficit en la España de la peseta

According to the literature, the predominance of budget deficits conditioned money growth in Spain while the peseta was its currency. The idea of a long-running fiscal interference in monetary dynamics is partly backed by the contribution of the public component to monetary base growth in 1874-1998. This paper confirms the existence of this interference by finding a long-running causal relationship between budget and money for the whole period. The weakening of causality between budget and the monetary base allows us to locate the end of seigniorage in Spain in the mid-1980s. It is not until the 1990s that the weakening of causality between budget and a broader definition of money (Liquid Assets held by the Public) reflected the efforts towards nominal convergence prior to joining the European Monetary Union. KEY Classification-JEL: E5, H6, N1

The Spanish peseta versus the pound sterling, the French franc and the US dollar (1870–1935). A long floating experience

This paper underlines the relevance of considering breaks in Purchasing Power Parity (PPP) tests, by studying the floating peseta over the period 1870–1935. In some cases, only the stationarity of the real exchange rate in the presence of structural breaks could be accepted. Moreover, breaks clearly improve the significance of the proportionality condition for the peseta/pound, peseta/franc and peseta/dollar exchange rates. So, since breaks are endogenously detected and seem to make economic sense, the PPP hypothesis is considered as a valid equilibrium rule for the peseta exchange rate against the currencies of Spains main traders between 1870 and 1935.

What causes the hidden economy in Spain

Estimating the size of the hidden economy continues to attract the interest of both researchers and politicians alike. However, and despite the recent increase in the technical sophistication of the two estimation methods most commonly employed in the empirical literature, namely the monetary approach and the multiple causes-indicators technique, it is necessary to continue making advances in our knowledge of the relationships between the hidden economy and its economic and institutional environment. Against this background, this paper sets out to provide empirical evidence on this question. Using the estimation made by Gadea and Serrano (2001) of hidden income in Spain during the period 1964–1998, a univariate and multivariate causality analysis is carried out between hidden income and the representative variables of the legal economy, taxation, the labour market and currency. The results allow one to draw a number of interesting conclusions on the complexity of these relationships.

Bounds, Breaks and Unit Root Tests

The paper addresses the unit root testing when the range of the time series is limited and considering the presence of multiple structural breaks. The structural breaks can affect the level and/or the boundaries of the time series. The paper proposes five unit root test statistics, whose limiting distribution is shown to depend on the number and position of the structural breaks. The performance of the statistics is investigated by means of Monte Carlo simulations.

Reconsidering the Structural Stability of the Real Exchange Rates

The properties of the historical real exchange rate series constructed in Taylor have been re-examined in this paper. Focusing on two significant sources of bias (structural change and small sample bias), our results do not support for Taylor’s claim that the abrupt changes which occurred throughout the twentieth century (political, economic, institutional, and so on) do not have any effect on the persistence of the real exchange rates. Our results indicate that both the assumption of structural stability and the hypothesis of nominal exchange rate neutrality are violated. The degree of shock persistence shows remarkable heterogeneity between and within monetary regimes. As a consequence, the monetary policymakers’ decisions seem to have a substantial impact on the different reverting dynamics.

Cyclical Properties of Spanish Defence Expenditure

The propensity of cutting some government spending during the crisis time generates the incentive for some policy-makers and governments to modify certain expenses irrespective to output variations. The goal of this paper is to analyse the cyclical properties of defence expenditure in Spain (1978–2009) and to characterize the consequences of economic and political cycles on this public spending.

The effects of macroeconomic stability on foreign trade. An analysis for Spain, 1986-2000

Two main factors underlie the rebirth of interest in the study of the influence of the real exchange rate on trade, the reduction of its volatility and the current trend towards price stability. The objective of this study is to analyse the effects of the process of nominal convergence, required of the European member states for the fulfilment of monetary integration, on foreign trade flows. The case of Spain, which is especially interesting in this context, is studied for the period 1986 to 2000. The results of estimating the aggregate functions of the export and import of goods shows how macroeconomic stability has altered the behaviour of trade with respect to the two basic determinants - income and prices - how it has caused a significant structural change in the real exchange rate and, finally, how it has laid the explanatory bases for transactions in the twenty-first century with the single currency - the euro.Two main factors underlie the rebirth of interest in the study of the influence of the real exchange rate on trade, the reduction of its volatility and the current trend towards price stability. The objective of this study is to analyse the effects of the process of nominal convergence, required of the European member states for the fulfilment of monetary integration, on foreign trade flows. The case of Spain, which is especially interesting in this context, is studied for the period 1986 to 2000. The results of estimating the aggregate functions of the export and import of goods shows how macroeconomic stability has altered the behaviour of trade with respect to the two basic determinants – income and prices – how it has caused a significant structural change in the real exchange rate and, finally, how it has laid the explanatory bases for transactions in the twenty-first century with the single currency – the euro.

GREAT MODERATION AND GREAT RECESSION: FROM PLAIN SAILING TO STORMY SEAS?: GREAT MODERATION VS. GREAT RECESSION

Many have argued that the Great Recession of 2008 marks the end of the Great Moderation of the eighties and nineties. This paper shows this is not the case through painstaking empirical analysis of the data. Output volatility remains subdued despite the tumult created by the Great Recession. This nding has important implications for policymaking since a lower volatility of output (the hallmark of the Great Moderation) is associated with lower recoveries. JEL classication: C22, E32