A general equilibrium assessment of external and domestic shocks in Spain

After many years of growth, the Spanish economy plunged into the most severe and prolonged recession recorded since reliable national accounts data have been available. The main goal of this paper is to quantify the effects of the external and domestic shocks that hit the Spanish economy in 2008-2009 by employing a disaggregated general equilibrium model calibrated to a 2000 SAM elaborated by the authors. External shocks are simulated by employing the neoclassical closure (private investment is determined by domestic and external savings) and the Keynesian closure (investment is exogenous). External and domestic shocks are also jointly simulated with the Keynesian closure. The results provide a good approximation to observed changes in key macroeconomic variables.

► Evaluation of reductions in exports, non‐resident consumption and investment. ► Investment is disaggregated by capital goods in the SAM we have elaborated. ► CGE models are very sensitive to the closure rules used to evaluate external shocks. ► The Keynesian closure is the most appropriate to analyze external shocks.