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The dynamic relationship between long term interest rates and fiscal stances in the EMU

September 17, 2018


Editor’s note: This post is part of a series showcasing Barcelona GSE master projects by students in the Class of 2018. The project is a required component of every master program.


Sybrand Brekelmans, Guillermo Sanz Marin, and Luca Tomassetti

Master’s Program:

Macroeconomic Policy and Financial Markets

Paper Abstract:

In this paper we study the dynamics and drivers of 10 year’s sovereign bond yields using a panel of the original 11 Eurozone countries (excluding Luxembourg). The interest of this study relies on the fact that despite very different macroeconomic policy stances in the variables that we believe determine interest rates among these countries, 10 years Eurozone bond yields almost perfectly converged during the 2000’s, before they suffered a sudden disconnection in the aftermath of the Great Financial Crisis.

To this end, we apply two different methodologies. A Panel Data approach (that we end discarding) and a Time Varying Coefficients model using the Kalman Filter, which allows us for capturing changes in the pricing mechanism of bond yields over time. Initially, by using the latter methodology without controlling for the volatility of the interest rates (which dramatically increased after 2008), we obtain very noisy results that are barely explainable, since the coefficients seem to be capturing these changes in volatility. Once we introduce in the filter a GARCH process for the variance-covariance matrix of the interest rates that we use in the Time Varying Coefficients approach, we manage to obtain much more meaningful and explicative results.

One of our key contributions is the inclusion of new fiscal and macroeconomic variables as determinants of yields in the different Eurozone countries, which were discarded by other studies in the field. We also contribute by controlling by common determinants to all the Eurozone countries, which we obtained by applying a common component approach. Furthermore, our findings confirm that after the period of divergence in interest rates, started in the aftermath of the Great Financial Crisis, and caused by a refocus on fundamentals, Eurozone interest rates have converged again under the effect of a normalization of bond yield drivers, similarly to their pre-crisis levels, although not to the same extent. Another implication that we find is that in times of economic uncertainty and financial hysteresis, when default risk becomes an issue, the effects of government policy on interest rates can significantly lead to accentuated crowding out effects.

Conclusions and key results:

Our work indicates that there has been a significant break in the way sovereign debt was priced after the Great Financial Crisis of 2008, indicating a return to fundamentals as main drivers of sovereign yields. We find that several factors reflective of fiscal and macroeconomic stances became increasingly important during the crisis, after having been ignored in previous years. As such, Debt to GDP, Deficit to GDP, GDP growth and Current Account balances to GDP, among others, started to play important roles in the determination of long term interest rates for Eurozone government bonds. In line with previous research, our findings confirm the existence of 3 distinct phases in the euro bond market. A period of high integration, a period of disintegration, and a phase of partial reintegration (Adam and Lo Duca (2017)).

Our findings suggest that during periods of economic uncertainty characterized by high volatility in the financial markets, investors tend to focus on fundamentals, while in times of economic boom they do not discriminate too much among the different stance of these macroeconomic determinants. This finding has important policy implications since it suggests that during economic crises interest rates react much more to unsustainable fiscal policies and macroeconomic imbalances than during calmer times, causing a great private sector crowding out effect (Laubach (2011)).

Therefore, our results suggest that governments should pay closer attention to their fiscal stances during times of economic turbulence in order to avoid the detrimental effects of high interest rates on activity in a period of economic agent´s lack of confidence. As argued before by De Grauwe and Ji (2013), this former effect is exacerbated by the fact that Eurozone governments have no control over monetary policy, making impossible for them to reduce interest rates by no other means than sound fiscal policies. In line with this result, we notice that the ECB’s unconventional monetary policy (we obtain that the impact of short term interest rates -one of our common determinants obtained by principal components- on long yields has diminished over time) helped to bring down European bond yields after 2014. This fact contributed to put the fiscal stances of these countries, and other essential macroeconomic variables, back to sustainable levels, that along with the structural reforms carried out (which in addition to the former effect, have also contributed to bring back economic confidence and dynamism) have had by its own another loosening impact in the interest rates that these countries have been facing in every debt issuance.

Regarding the methodologies used to address our research question, we were able to obtain robust results and determine which method was the most appropriate to investigate the drivers of 10 year’s sovereign bond yields. We found that panel data approaches, which are widely used in the literature, lead to unstable and unsatisfactory results, causing us to attach limited credibility to the outcomes of such analysis. However, the Time Varying Coefficients approach seems more reliable and yields more robust and plausible results after we model the changes in volatility appropriately. We believe that having a larger sample (we use the forecasts released twice a year by the IMF in its World Economic Outlook and by the OECD in their Economic Outlook in order to control by the effect of the market´s forward looking in current levels of interest rates, as well as by reverse causality) would have allowed us to obtain more reliable results on this approach as well.

A suggestion for further research would be to apply Bayesian techniques to estimate our model. Indeed, given the limited amount of data available and the complexity of our models, these methods seem to suit better in this kind of estimation, where the great amount of parameters, as well as the possible presence of non-linearities, can make the optimization process very costly. Consequently, this methodology would have allowed us to also model the variance of the Time Varying Parameters, and not only the ones of the interest rates (our observables) with another GARCH or stochastic volatility process, since we expect that these variances could also follow a conditional process, which might have an impact on our estimation results.




Download the full paper [pdf]

More about the Macro Program at the Barcelona Graduate School of Economics


Price Parity Clauses: Setting a new legal standard

September 12, 2018


Editor’s note: This post is part of a series showcasing Barcelona GSE master projects by students in the Class of 2018. The project is a required component of every master program.


Samantha Catalina Guerrero Putz and Josep Peya

Master’s Program:

Competition and Market Regulation

Paper Abstract:

Under the context of digital platforms who act as an intermediary between consumers and sellers, Price Parity Clauses (PPCs) is a contractual restriction for the seller not to sell at a lower price through any other channel (the so-called wide PPCs), or only in its own channel (narrow PPCs). These clauses present a trade-off between efficiencies and anticompetitive effects. On one side, PPCs act as a committing device of the seller to solve the show-rooming effect suffered by platforms (a particular form of free- riding), at the same time that it ensures platforms viability and enhances its incentives to invest and innovate. On the other side, PPCs allow platforms to charge higher fees, and lead to foreclosure of the market. Currently, neither the EC nor NCAs have set a clear guidance on how to assess these clauses. The main contribution of this paper is to set a legal standard for both wide and narrow PPCs using the cost-error analysis. The conclusions we arrived to are that wide PPCs should be per se illegal; and narrow PPCs should be presumed legal unless proven otherwise, except if narrow PPCs are eliminating the competitive restraints of the platform, in which case the standard should be that of rebuttable presumption of illegality.


  1. Digital Economy will rise the use of Digital Platforms. Network externalities inherent to two-sided markets lead to high market power that make platforms an indispensable ally.
  2. Digital Platforms use PPCs and this is capturing the interest of Competition Authorities. But there is no consensus with respect to the legal standard.
  3. PPCs present a trade-off: On the one hand efficiencies results in reduction of search costs, prevents showrooming, incentives on investment and innovation. On the other hand, anti-competitive effects arise, creating high fees, foreclosure, collusion.
  4. The results of our cost-error analysis are that Wide PPCs Min Type II error, therefore should be Per se illegal. Narrow PPCs Min Type I error: Rebuttable Presumption of Legality, except if (i) One-Stop Shop/Network; (ii) Brand Positioning; (iii) Switching costs: Min. Type II: Rebuttable Presumption of illegality

Download the full paper [pdf]

More about the Competition and Market Regulation Program at the Barcelona Graduate School of Economics

Spillover Effects from the Financial Sector: A Network Analysis for the Eurozone

September 3, 2018


Editor’s note: This post is part of a series showcasing Barcelona GSE master projects by students in the Class of 2018. The project is a required component of every master program.


Jordi Gutiérrez, Domenic Kellner, Philip King, Simon Neumeyer, and Dorota Scibisz

Master’s Program:


Paper Abstract:

We identify contemporaneous and Granger-causal linkages between the 86 biggest companies, representing both the financial and real sectors, of the Eurozone economy that serve as paths of shock transmission. Network analysis lends itself very naturally to the study of systemic risk due to its preoccupation with interconnections and notions of centrality. We employ an estimation methodology introduced by Barigozzi and Brownlees (2018) using market data for daily volatilities from the Eurostoxx index. Our results are in line with the existing literature – the banking sector is found to be highly interconnected and responsible for most Granger-network spillovers. Moreover, only a small subset of firms appear to Granger-cause other residual volatilities, providing support for regulators’ targeting of Systemically Important Financial Institutions.


Following the work of Barigozzi and Brownlees (2018), this paper applies the nets algorithm to study the interconnectedness of the 86 biggest firms in the Eurozone for a sample period spanning from May 2008 to April 2018. We have estimated two sparse networks of return volatilities that allow us to measure systemic risk and detect patterns of its transmission. Compared to the original study of the US economy, we have utilised a more detailed set of industries. What is more, country-specific volatilities were added as an extra factor in order to obtain more precise firm-specific residual volatilities, while still uncovering a large number of connections.

At the contemporaneous level almost all industries exhibit high connectedness, a pattern which became immediately apparent on the initial heatmaps of residual correlations. Even when controlling for sectoral and country volatilities we find clusters of firms reacting strongly with other firms within the same business area. These co-movements are especially remarkable within the banking, industrial, and technological sectors.

However, it is a small subset of companies, mostly financial firms, that displays high interconnectedness at the Granger-causal level. Consequently, we conclude that banks are particularly important risk transmitters in the Eurozone network. The subset of banks is especially susceptible to volatilities stemming from other sectors. This makes intuitive sense as we can think of banks being highly leveraged when compared with other entities (Freixas et al., 2015). Moreover, banks amplify and transmit shocks to all the other sectors, which reflects their unique economic role as financial intermediaries. Altogether, this provides empirical support for the regulatory targeting of certain Systemically Important Financial Institutions.

Download the full paper [pdf]

More about the Economics Program at the Barcelona Graduate School of Economics

CNN interview with Miguel Angel Santos (ITFD ’11, ECON ’12) on the crisis in Venezuela

August 31, 2018

Master’s alum Miguel Angel Santos was interviewed on CNN’s Global Portfolio where he shared his analysis of the economic crisis in Venezuela. From his post on LinkedIn:

“The collapse of Venezuela has a magnitude never before seen: it is the only country in the top ten of falls in GDP in five years in history (ninth, 45%), of falls in imports (third, 75%), and is also projected as one of the most intense hyperinflations in history, comparable only to Germany and Zimbabwe. There is no country on those three lists which has suffered collapses in imports, production, and hyperinflation at this level of intensity. It’s unprecedented.”


Miguel Angel is a graduate of both the Barcelona GSE Master’s Program in International Trade, Finance, and Development and the Master’s Program in Economics. He is now Adjunct Lecturer in Public Policy at Harvard Kennedy School, and Senior Research Fellow at the Center for International Development (CID) at Harvard University.

Can import promotion increase export performance in times of global value chains? Firm-level evidence from Russia

August 28, 2018

Port of Novorossiysk

Editor’s note: This post is part of a series showcasing Barcelona GSE master projects by students in the Class of 2018. The project is a required component of every master program.


Deepshikha DebNils HandlerVladimir PeciarKsenia ProkaJuliane Stolle

Master’s Program:

International Trade, Finance, and Development

Paper Abstract:

This paper analyzes whether access to imported intermediate goods can raise export performance of Russian firms. We employ an instrumental variable strategy which exploits variation in firm-specific input tariffs to identify the effect of imported intermediates on firm exports during the period 2007-2013, utilizing a unique firm-level database on firm characteristics and customs declarations. We find that input tariff reductions can raise firm exports significantly, as can other measures aimed at increasing imports of intermediate goods of exporting firms in Russia. Import promotion targeted at exporting firms in high-tech sectors can be up to three times more effective. Better access to imports can also help increase the currently low share of exporting firms within the Russian enterprise landscape. Our results suggest that with the rising globalization and fragmentation of production processes, countries interested in raising exports need to think strategically of promoting imports as well. We propose and discuss several policy measures for Russia in the areas of tariff regulation, non- tariff measures, trade facilitation and trade integration.


Using a comprehensive firm-level dataset which combines information on Russian company characteristics, involvement in trade and input tariff rates, we reveal a strong positive impact of intermediate imports on firm exports in the manufacturing sector. These results imply that improved access to intermediate goods at the international market can serve as a means to raise Russia’s currently weak export performance outside the natural resource sector. Import promotion policies targeted at intermediate goods imported by firms in high-tech sectors can be especially effective and raise exports by up to three times more than in other sectors. Better access to imports can also help increase the currently low share of exporting firms within the Russian enterprise landscape.

Our estimation results indicate that a one percentage point decrease in input tariffs would raise firm exports by approximately one percent. Even though tariffs have been significantly decreased over the past decade in the context of regional integration and Russia’s WTO accession (see figure 1), there is still ample room to lower input tariffs in order to promote exports. More than 40 percent of intermediate goods imported by Russian exporting manufacturing firms and more than 30 percent of goods imported by exporting firms in high-tech manufacturing sectors still entered the customs union at a tariff rate above 5 percent in 2015. Besides tariff reductions, Russia could consider lowering non-tariff measures (NTMs) and enhancing trade facilitation, which can also contribute to better access to intermediate goods of exporting firms, as suggested by our IV results. As can be seen from figure 2, NTMs have increased sharply since Russia joined the WTO in 2012. It should be pointed out, however, that trade policies aimed at promoting imports of intermediate goods alone will not be sufficient to boost non-oil export growth and export competitiveness of Russian firms. To bring the desired success, they need to be combined with a range of other important policies, including improving access of Russian exporters to foreign markets and simplifying the existing export regulation, as well as comprehensive structural reforms and measures to improve the business environment.

Key Figures:

figure figure

Download the full paper [pdf]

More about the ITFD Program at the Barcelona Graduate School of Economics

The causal impact of cesarean sections on neonatal health

July 2, 2018

This post has been written by Ana Costa Ramón and Ana Rodríguez González.  Both are PhD candidates at the Economics department of Universitat Pompeu Fabra.

In recent decades there has been an increasing concern about the rise of cesarean section births. Among OECD countries in 2013, on average more than 1 out of 4 births involved a c-section (OECD, 2013), being one of the most commonly performed surgeries. Cesarean sections, performed when needed and under standard quality measures, save lives. However, unnecessary c-sections not only impose significant costs for the health system but can also negatively impact infant health.  Previous literature has found cesarean sections to be associated with several adverse health outcomes for the newborn (Grivell & Dodd, 2011) and with worse later infant health(Keag, Norman, & Stock, 2018). However, most of the studies that came to these conclusions compared mothers who gave birth vaginally with those that had a cesarean section, and this may produce biased results: mothers who give birth by c-section are likely to have different characteristics from those who have vaginal births, and this may influence the health outcomes of the child and the mother after delivery.

In a recent paper, published in the Journal of Health Economics (Costa-Ramón, Rodríguez-González, Serra-Burriel, & Campillo-Artero, 2018), we contribute to fill this gap by providing causal evidence of the impact of avoidable cesarean birth on neonatal health. To do so, we exploit variation in the probability of having a c-section that is unrelated to maternal characteristics: variation by time of day.

In particular, using data from four public hospitals in Spain, we first document that the probability of having an unplanned c-section is higher in the early hours of the night (from 11 pm to 4 am) and that this is not driven by different characteristics of mothers giving birth during these times. Figure 1 shows the c-section rate at different times of day in our sample. We can observe that the distribution of unscheduled c-sections by time of birth is not uniform. Births that take place between 11 pm and 4 am are around 6 percentage points more likely to be by cesarean.


Notes: The figure represents the proportion of unplanned c-sections by time of day over the sample of unplanned c-sections and vaginal births. Sample is restricted to single births, unscheduled c-sections and vaginal births (excluding breech vaginal babies).

We argue that, given the medical shift structure in public hospitals and the larger time-cost of surveillance implied by vaginal deliveries, doctors’ incentives to perform c-sections in ambiguous cases may be higher during these times. In fact, we are not the first to document peaks in the unplanned c-section rate during the early night. Previous studies interpret this variation as evidence that convenience and doctors’ demand for leisure influence timing and mode of delivery (Brown, 1996; Fraser et al., 1987; Hueston, McClaflin, & Claire, 1996; Spetz, Smith, & Ennis, 2001).

We take advantage of this exogenous variation and use time of day as an instrument for the probability of having an unplanned c-section. This allows us to compare mothers that give birth in the same hospital and have similar observable characteristics, differing only in the time of delivery. Our results suggest that these non-medically indicated c-sections lead to a significant worsening of Apgar scores of approximately one standard deviation, but we do not find effects on more extreme outcomes such as needing reanimation, being admitted to the ICU or on neonatal death. This is an important finding, given that previous studies in the medical literature documented an association between c-sections and an increased risk of serious respiratory morbidity and subsequent admission to neonatal ICU (Grivell & Dodd, 2011). Their findings are consistent with the results of our OLS estimation, suggesting that former analysis might have been capturing the underlying health status of newborns who need a medically necessary cesarean.

A few words on the publication process and media coverage

Given that it was a health-oriented paper, we decided to target a top field journal in health economics. We were very lucky and all the publication process went very fast and smoothly.  We had to revise the paper once and get additional data in order to be able to address some of the reviewers’ comments.

When it was published, with the help of UPF’s communication unit we sent a press release and our paper got attention from the Spanish media.  We knew that it was a controversial topic (especially from the doctors’ perspective) so we chose our words carefully, but still we got some slightly sensationalist headlines.  We learnt the lesson: you have to choose a catchy punchline yourself, or they will pick their own (and you won’t always like it).

Overall, it has been an intense and fruitful experience!


Brown, H. S. (1996). Physician demand for leisure: Implications for cesarean section rates. Journal of Health Economics, 15(2), 233–242.

Costa-Ramón, A. M., Rodríguez-González, A., Serra-Burriel, M., & Campillo-Artero, C. (2018). It’s about time: Cesarean sections and neonatal health. Journal of Health Economics, 59.

Fraser, W., Usher, R. H., McLean, F. H., Bossenberry, C., Thomson, M. E., Kramer, M. S., … Power, H. (1987). Temporal variation in rates of cesarean section for dystocia: Does “convenience” play a role? American Journal of Obstetrics and Gynecology, 156(2), 300–304.

Grivell, R. M., & Dodd, J. M. (2011). Short- and long-term outcomes of cesarean section. Expert Review of Obsetrics and Gynecology, 6(2), 205–216.

Hueston, W. J., McClaflin, R. R., & Claire, E. (1996). {V}ariations in cesarean delivery for fetal distress. The Journal of Family Practice, 43(5), 461–467.

Keag, O. E., Norman, J. E., & Stock, S. J. (2018). Long-term risks and benefits associated with cesarean delivery for mother, baby, and subsequent pregnancies: Systematic review and meta-analysis. PLoS Medicine, 15(1), 1–22.

OECD. (2013). Health at a Glance 2013: OECD Indicators. Paris: OECD Publishing.

Spetz, J., Smith, M. W., & Ennis, S. F. (2001). Physician Incentives and the Timing of Cesarean Sections: Evidence from California Physician Incentives and the Timing of Cesarean Sections Evidence From California. Source: Medical Care MEDICAL CARE, 39(6), 536–550.


The new wealth of our nation: the case for a citizen’s inheritance

June 21, 2018

report cover

George Bangham (Economics of Public Policy ’17) is an economic researcher at the Resolution Foundation, a London-based think-tank that carries out research and policy analysis to improve the living standards of people in the UK on low and middle incomes. In recent years the Foundation has been influential in advocating for a living wage and for policymakers to consider the intergenerational impact of public policy. George’s own work focuses on labour markets and social security policy, with his recent publications covering issues from working hours to tax reform.

One of his recent papers, “The new wealth of our nation: the case for a citizen’s inheritance,” has received international attention in the media and was featured in an article in La Vanguardia newspaper this May.

Report summary:

The Intergenerational Commission has identified two major trends affecting young adults today, beside the weak performance of their incomes and earnings, which barely featured in political debate for much of the 20thcentury. The first is that risk is being transferred from firms and government to families and individuals, in their jobs, their pensions and the houses they live in. The second is that assets are growing in importance as a determinant of people’s living standards, and asset ownership is becoming concentrated within older generations – on average only those born before 1960 have benefited from Britain’s wealth boom to the extent that they have been able to improve on the asset accumulation of their predecessors. Both trends risk weakening the social contract between the generations that the state has a duty to uphold, as well as undermining the notion that individuals have a fair opportunity to acquire wealth by their own efforts during their working lives.

This paper, the 22nd report for the Intergenerational Commission, makes the case for the UK to adopt a citizen’s inheritance – a universal sum of money made available to every young person when they reach the age of 25 to address some of the key risks they face – as a central component of a policy programme to renew the intergenerational contract that underpins society.

Policy recommendations from the report:

  1. From 2030, citizen’s inheritances of £10,000 should be available from the age of 25 to all British nationals or people born in Britain as restricted-use cash grants, at a cost of £7 billion per year.
  2. To reflect the experiences of those who entered the labour market during and since the financial crisis, and to minimise cliff edges between recipients and non-recipients, the introduction of citizen’s inheritances should be phased in, starting with 34 and 35 year olds receiving £1,000 in 2020. Each subsequent year, citizen’s inheritance amounts should then rise and be paid to younger groups, until the policy reaches a steady-state in 2030 when it is paid to 25 year olds only from then on.
  3. The citizen’s inheritance should have four permitted uses: funding education and training or paying off tuition fee debt; deposits for rental or home purchase; investment in pensions; and start-up costs for new businesses that are also being supported through recognised entrepreneurship schemes.
  4. The citizen’s inheritance should be funded principally by the new lifetime receipts tax, with additional revenues from terminating existing matched savings schemes – the Help to Buy and Lifetime ISAs.

Visit the Resolution Foundation’s website to download the full report

Press release from the Intergenerational Commission

Connect with George on LinkedIn

Barcelona GSE Master’s in Economics of Public Policy