Exploring the sources of Spanish macroeconomic fluctuations: An estimation of a small open economy DSGE model

- The estimated model is able to explain the Spanish dual inflation phenomenon.
- The preference shock basically accounts for private consumption volatility.
- The productivity shock mainly accounts for non-tradable output volatility.
- Productivity and international interest rate shocks mainly explain tradable output.
- The model largely replicates the time paths for actual Spanish data.

This paper analyzes the role of a variety of shocks as determinants of Spanish macroeconomic fluctuations before the international financial and economic crisis (1970-2008). To do this we estimate a small open economy stochastic model using Kalman Filter techniques. The set of estimated parameters allows the replication with remarkable accuracy of the time path for the major macroeconomic aggregates. In particular, the model reproduces the so-called dual inflation phenomenon which burdens the competitiveness of the Spanish economy.