Fiscal Policy, Structural Reforms and External Imbalances: A Quantitative Evaluation for Spain

53 Pages Posted: 23 Apr 2011

See all articles by Angel Gavilan Gonzalez

Angel Gavilan Gonzalez

European Stability Mechanism

Pablo Hernández de Cos

Banco de España

Juan F. Jimeno

Banco de España - Research Department; Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Juan A. Rojas

Banco de España

Date Written: April 20, 2011

Abstract

This paper builds a large overlapping generations model of a small open economy featuring imperfect competition in the labor and product markets to understand i) which were the main determinants of the large expansionary phase experienced in Spain from the mid-1990s until the arrival of the global financial crisis in 2007-2008, ii) what role fiscal policy and structural reforms could have played to avoid the build-up of large external imbalance over this period, and iii) how these policies could affect the recovery of economic activity in Spain after the crisis. Our results indicate that falling interest rates and demographic changes were the main drivers of the Spanish expansionary phase. As for the macroeconomic behavior of the Spanish economy after the crisis, our results suggest that a front-loading in fiscal consolidation together with structural reforms that eliminate distortions in the goods and labor markets could make the recovery of economic activity in Spain more successful.

Keywords: overlapping generations, imperfect competition, fiscal consolidation, demographic change, structural reforms

JEL Classification: E62, H30, J11

Suggested Citation

Gavilan Gonzalez, Angel and Hernández de Cos, Pablo and Jimeno, Juan F. and Rojas, Juan A., Fiscal Policy, Structural Reforms and External Imbalances: A Quantitative Evaluation for Spain (April 20, 2011). Banco de Espana Working Paper No. 1107, Available at SSRN: https://ssrn.com/abstract=1816327 or http://dx.doi.org/10.2139/ssrn.1816327

Angel Gavilan Gonzalez (Contact Author)

European Stability Mechanism ( email )

6a Circuit de la Foire Internationale
L-1347
Luxembourg

Pablo Hernández de Cos

Banco de España ( email )

C/ Alcalá 48
Madrid, 28014
Spain

Juan F. Jimeno

Banco de España - Research Department ( email )

Alcala 48
28014 Madrid
Spain

Centre for Economic Policy Research (CEPR)

London
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Juan A. Rojas

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

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