International Capital Flows and the Boom-Bust Cycle in Spain

35 Pages Posted: 13 May 2014

See all articles by Jan in 't Veld

Jan in 't Veld

European Union - Directorate General for Economic and Financial Affairs (DG ECFIN)

Robert Kollmann

ECARES, Université Libre de Bruxelles; University of Paris XII - Department of Economics; Centre for Economic Policy Research (CEPR)

Beatrice Pataracchia

JRC-Ispra, European Commission

Marco Ratto

European Commission - Joint Research Center

Werner Roeger

European Commission, DGECFIN

Date Written: May 1, 2014

Abstract

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 a 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; firm credit constraints tightened later and more gradually, and contributed much less to the slump.

Keywords: international capital flows, boom-bust cycle, sudden stop, housing market, financial frictions, Spain, European Monetary Union

JEL Classification: C11, E21, E32, E62

Suggested Citation

in 't Veld, Jan and Kollmann, Robert and Pataracchia, Beatrice and Ratto, Marco and Roeger, Werner, International Capital Flows and the Boom-Bust Cycle in Spain (May 1, 2014). Crawford School Research Paper No. 40/2014, Available at SSRN: https://ssrn.com/abstract=2436234 or http://dx.doi.org/10.2139/ssrn.2436234

Jan In 't Veld

European Union - Directorate General for Economic and Financial Affairs (DG ECFIN) ( email )

CHAR 14/245
Brussels, Bruxelles B-1049
Belgium
(32 2) 2993 577 (Phone)
(32 2) 2957 499 (Fax)

Robert Kollmann (Contact Author)

ECARES, Université Libre de Bruxelles ( email )

Ave. Franklin D Roosevelt, 50 - C.P. 114
Brussels, B-1050
Belgium

University of Paris XII - Department of Economics ( email )

61 avenue du General de Gaulle
Creteil cedex, 94010
France

HOME PAGE: http://www.robertkollmann.com

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Beatrice Pataracchia

JRC-Ispra, European Commission ( email )

Via Enrico Fermi 2749, Ispra, VA
Ispra (VA), 21027
Italy

HOME PAGE: http://https://ec.europa.eu/jrc/en/institutes/ipsc

Marco Ratto

European Commission - Joint Research Center ( email )

Via E. Fermi 2749
Brussels, B-1049
Belgium

Werner Roeger

European Commission, DGECFIN ( email )

Economic and Financial Affairs
BU1-3/159, 200 Rue de la Loi
B-1049 Brussels
Belgium

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
35
Abstract Views
669
PlumX Metrics