Samuel Hurtado

DSGE Models and the Lucas Critique

Modern DSGE models are microfounded and have deep parameters that should be invariant to changes in economic policy, so in principle they are not subject to the Lucas critique. But the literature has already established that misspecification issues also cause parameter instability after policy changes in DSGE models. This paper will look at the implications of parameter shifts for econometric policy evaluation, to see whether policy advice derived from DSGE models would have differed fundamentally from that which the policymakers of the 1970s derived from their reduced-form Phillips curves. The results show drift in most parameters, including those that are supposedly structural (such as the share of capital in production, habits or the elasticity of labor supply to the real wage), and major shifts in the impulse response functions derived from the real-time estimation of the model. After the expansionary monetary shocks of the early 1970s, a standard DSGE model would have behaved very similarly to an old-style Phillips curve, with marked shifts in parameter values and impulse response functions.

Update and Re-Estimation of the Quarterly Model of Banco De España (MTBE)

The Quarterly Model of Banco de Espana (MTBE, Modelo Trimestral del Banco de Espana) is a large-scale macro-econometric model used for medium term macroeconomic forecasting of the Spanish economy, as well as for evaluating the staff projections and performing scenario simulations. The model is specified as a large set of error correction mechanism equations, and, especially in the short run, is mostly demand driven. This paper presents an update of the model, estimated with data from 1995-2012. In this new version, private productive investment and employment react more to output, capturing the higher sensitivity of these variables observed during the crisis, and prices and wages react less both to each other and to the evolution of real variables. Credit is now an endogenous variable in the model and it also helps explain the behaviour of the main demand components. As a result of all these changes, simulations now generally display a somewhat stronger demand channel and show nominal effects that are both smaller and with less inertia. The updated model describes an economy that is more reactive to financial shocks other than changes in interest rates, where wage moderation can generate growth and employment if it is followed by price moderation and where fiscal consolidation reduces public deficit and has negative but moderate effects on GDP.

Public Finances and Inflation: The Case of Spain

We empirically explore the influence of inflation on fiscal variables in the short, medium and long run, for the case of the Spanish economy, in particular to draw policy lessons for the design of the ongoing process of rebalancing of fiscal accounts. We focus on this topic through the lenses of: (i) the government budget constraint, to assess the influence of inflation on changes in public debt; (ii) accounting decompositions of nominal revenue and expenditure items into their real and price parts; (iii) a large-scale macroeconometric model that contains a detailed fiscal policy block; and (iv) a long-run accounting model on pension expenditure