In this paper we evaluate the empirical performance for the Spanish economy of a standard real-business-cycle (RBC) model. The RBC approach has produced important advances in the investigation of the aggregate fluctuations associated with the business cycle. However, there is a small number of applications of the RBC methodology to the analysis of the fluctuations of the Spanish economy. One of the main reasons underlying this circumstance is the lack of appropriate data. In fact, only recently National Accounts have been available on a quarterly basis. Moreover, the additional data sources, which are generally needed to round off the selection of parameter values, often lack an adequate homogeneity. Consequently, the first objective of this paper is to build an appropriate data set for the Spanish economy to fulfill the basic measurement requirements of RBC exercises.
Not only the lack of reliable data justifies the absence of RBC models for the Spanish economy. One of the most recurrent arguments amongst the (Spanish) detractors of the RBC approach can be stated in terms of its inappropriateness to the study of the labor-market fluctuations in economies with high unemployment. Another argument typically arises when discussing the role of the government sector in OECD economies other than the US. These two reasons lead us to choose as our standard RBC benchmark the specification proposed by Christiano and Eichenbaum (1992). Undoubtedly, as a variant of Hansen (1985) and Rogerson's (1988) indivisible labor model, Christiano and Eichenbaum's (1992) constitutes one of the most significant advances in the study of the key labor-market features in the RBC tradition. These authors modify the indivisible labor model by allowing government consumption shocks to influence labor-market dynamics. Their empirical results indicate that this change improves the predictions of the model throughout its labor-market dimension and, in particular, with respect to the observed weak correlation between hours worked and wages, the so-called Dunlop-Tarshis observation.
Of course, in the last seven years much progress has been made on the labor market dimension of business cycle models, often through departures from the assumption of perfectly competitive labor markets. However, none of these contributions belongs to the mainstream of the RBC research program. We would like to see whether the main conclusions of Christiano and Eichenbaum's (1992) RBC models hold when parameter values are chosen to fit the Spanish data.
Thus, the motivation of this paper is twofold: i) following Christiano (1987) and Cooley and Prescott (1995), to define a set of measurements of the Spanish economy consistent with the type of models under consideration, and ii) to evaluate the validity of the main conclusions of the RBC models on Spanish data, in particular in one of their most critical dimensions: labor-market fluctuations. This will allow us to achieve a better characterization of both the cyclical properties and the long-run features of the Spanish economy. Also, we will be able to provide a set of results that can be useful for future research. This research should involve both extensions of the models and improvements in the data set.
As has been stated above, the specification of a stochastic dynamic general equilibrium model we adopt is the one proposed by Christiano and Eichenbaum (1992). This specification incorporates: i) the divisible and indivisible labor hypothesis, and ii) either the presence or absence of the government sector. The indivisible labor model in Rogerson (1988) and Hansen (1985) assumes that individuals either work a fixed number of hours or they do not work at all. If the individuals can choose the probability of working, then it is possible to widen the set of choices in such a way that the economy behaves as if there were no indivisibilities. This gives rise to fluctuations in aggregate employment relatively more important than variations in the labor productivity since the marginal disutility of an extra unit of individuals at work is constant and independent of the number of individuals who work. Christiano and Eichenbaum (1992), building upon Hansen (1985), argue that the observed weak correlation between hours worked and productivity suggests that technology shocks cannot be the only impulse behind aggregate fluctuations. The rationale for this is that, with technology shocks, movements in equilibrium wages and hours are mainly due to movements along the labor sup-ply curve, which results in a high positive correlation between these two variables. Consequently, when innovations in government expenditures are incorporated into the analysis the empirical performance of the model is improved.
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