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International Capital Flows and the Boom-Bust Cycle in Spain

Author(s): Jan in ‘t Veld, Robert Kollmann, Beatrice Pataracchia, Marco Ratto, Werner Roeger

International Capital Flows and the Boom-Bust Cycle in Spainpdf(2 MB) Choose translations of the previous link 

Summary for non-specialistspdf(36 kB) Choose translations of the previous link 

We study the joint dynamics of foreign capital flows and real activity during the recent boom-bust cycle of the Spanish economy, using a three-country New Keynesian model with credit-constrained households and firms, a construction sector and a government. We estimate the model using 1995Q1-2013Q2 data for Spain, the rest of the Euro Area (REA) and the rest of the world. We show that falling risk premia on Spanish housing and non-residential capital, a loosening of collateral constraints for Spanish households and firms, as well as the fall in the interest rate spread between Spain and the REA fuelled the Spanish output boom and the persistent rise in foreign capital flows to Spain, before the global financial crisis. During and after the global financial crisis, falling house prices, and a tightening of collateral constraints for Spanish borrowers contributed to a sharp reduction in capital inflows, and to the persistent slump in Spanish real activity. The credit crunch was especially pronounced for Spanish households.

(European Economy. Economic Papers 519. June 2014. Brussels. PDF. 56pp. Tab. Graph. Ann. Bibliogr. Free.)

KC-AI-14-519-EN-N (online)KC-AI-14-519-EN-C (print)
ISBN 978-92-79-35168-6 (online)ISBN 978-92-79-36113-5 (print)
doi: 10.2765/70037 (online)doi: 10.2765/77686 (print)

JEL classification: C11, E21, E32, E62

Economic Papers are written by the staff of the Directorate-General for Economic and Financial Affairs, or by experts working in association with them. The Papers are intended to increase awareness of the technical work being done by staff and to seek comments and suggestions for further analysis. The views expressed are the author’s alone and do not necessarily correspond to those of the European Commission.

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