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Fiscal policy, structural reforms and external imbalances: a quantitative evaluation for Spain

  • Ángel Gavilán

    ()

    (Banco de España)

  • Pablo Hernández de Cos

    ()

    (Banco de España)

  • Juan F. Jimeno

    ()

    (Banco de España)

  • Juan A. Rojas

    ()

    (Banco de España)

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.

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File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/11/Fich/dt1107e.pdf
File Function: First version, April 2011
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Paper provided by Banco de España & Working Papers Homepage in its series Working Papers with number 1107.

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Length: 53 pages
Date of creation: Apr 2011
Date of revision:
Handle: RePEc:bde:wpaper:1107
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Web page: http://www.bde.es/bde/en/secciones/informes/Publicaciones_se/docs/
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  1. Andrés, Javier & Ortega, Eva & Vallés, Javier, 2008. "Competition and inflation differentials in EMU," Journal of Economic Dynamics and Control, Elsevier, vol. 32(3), pages 848-874, March.
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