Imbalances and rebalancing scenarios in an estimated structural model for Spain

This paper uses an estimated DSGE model to analyse the factors behind the build-up of imbalances in the Spanish economy. Shock decompositions suggest that external imbalances have been able to build up mainly due to the reduction in real interest rates and easier access to credit following the elimination of the exchange rate risk premium. While the reduction in external imbalances has started in the recent period, projections of the estimated model indicate that faster correction to these imbalances will require an adjustment in domestic demand and a significant improvement in the trade balance in the coming years. The correction would be eased in a more favourable and less risk-averse environment.