A rational expectations model for simulation and policy evaluation of the Spanish economy

Abstract

This paper presents the model used for simulation purposes within the Spanish Ministry of Economic Affairs and Finance. REMS (a Rational Expectations Model for the Spanish economy) is a small open economy dynamic general equilibrium model in the vein of the New-Neoclassical-Keynesian synthesis models, with a strongly micro-founded system of equations. In the long run REMS behaves in accordance with the neoclassical growth model. In the short run, it incorporates nominal, real and financial frictions. Real frictions include adjustment costs in consumption (via habits in consumption and rule-of-thumb households) and investment into physical capital. Due to financial frictions, there is no perfect arbitrage between different types of assets. The model also allows for slow adjustment in wages and price rigidities, which are specified through a Calvo-type Phillips curve. All these modelling choices are fairly in line with other existing models for the Spanish economy. One valuable contribution of REMS to the renewed vintage of D(S)GE models attempting to feature the Spanish economy is the specification of the labour market according to the search paradigm, which is best suited to assess the impact of welfare policies on both the intensive and extensive margins of employment. The model's most valuable asset is the rigour of the analysis of the transmission channels linking policy action with economic outcomes.

MEDEA: a DSGE model for the Spanish economy

“…Some examples are the Federal Reserve Board (Erceg et al 2006), the European Central Bank (Christoffel et al 2008), the Bank of Canada (Murchison and Rennison 2006), the Bank of England (Harrison et al 2005), the Bank of Finland (Kilponen and Ripatti 2006;Kortelainen 2002), the Bank of Sweden (Adolfson et al 2005) the Bank of Spain (Andrés et al 2006), and the Spanish Ministry of Economics and Finance (Ministerio de Economía y Hacienda) (Boscá et al 2007). As such, MEDEA is a model that it is comparable to its peers and can borrow from many years of experience.…”

Forecasting the Spanish economy with an augmented VAR–DSGE model

“…Table 2 summarizes our assumptions regarding prior distributions for the estimated parameters and the posterior distribution corresponding to the DSGE-AR and DSGE-VAR models for the complete sample period. The estimates appear quite rea-8 See Boscá et al (2007) for a description of the BD-REMS database. 9 Estimates were drawn up using Dynare 4 running under Matlab v7, R14.…”

“…2 The increasing number and size of the models recently developed account for the success of this methodology. The REMS model by Boscá et al (2009); the MEDEA model by Burriel et al (2009); the BEMOD model by Andrés et al (2006) are just some of the DSGE developed recently for the Spanish economy.…”

German labor market and fiscal reforms 1999–2008: Can they be blamed for intra-euro area imbalances?

“…Following Boscá et al (2009Boscá et al ( , 2010Boscá et al ( , 2011, we assume that a union, which takes into account (aggregate) utility of optimizing and RoT households, undertakes the bargaining. 5 Furthermore, we assume staggered bargaining of nominal wages similar to Gertler et al (2008).…”