Fiscal Policy, Structural Reforms and External ImbalancesA Quantitave Evaluation for Spain
- Gavilán, Angel
- Hernández de Cos, Pablo
- Jimeno Serrano, Juan Francisco
- Rojas Blaya, Juan Alberto
ISSN: 0026-959X
Year of publication: 2011
Issue: 232
Pages: 49-109
Type: Article
More publications in: Moneda y crédito
Abstract
This paper builds a large overlapping generations model of a small open economy featuring imperfect competition in the labor and product markests to undestand i)which were the main determinats of the large expansionary phase experience 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 fot the macroeconomic behavior of the Spanish economy after the crisis, our results suggest that a front-loading in fiscal consolidation togeher with structural reforms that eliminate distorisions in the goods and labor markets could make the recovery of economic activity in Spain more successful.