IGIER fellows and affiliates publish books and articles in academic journals. Their current research projects are featured in the Working Paper series.
This paper presents firm level evidence on the change of non-manual wage premia and employment shares in Italian manufacturing during the nineties. We find that the relative stability of aggregate wage premia and employment shares hides offsetting disaggregate forces. First, while technical progress raises the relative demand for skilled labor within firms, demand changes associated with exports reduce the relative demand for skills. Second, within the class of non-manual workers, wage premia and employment shares of executives rise substantially, whereas those of clerks fall in a similar proportion. We also find that the export status of firms plays a key role in explaining labor market dynamics, as exporters account for most of both demand-related and technology-related shifts. Overall, our results for Italy question the general validity of the conventional view that emphasizes the role of labor market institutions, as opposed to trade and technology, in determining wage and employment dynamics in continental Europe.
Time series models are often adopted for forecasting because of their simplicity and good performance. The number of parameters in these models increases quickly with the number of variables modelled, so that usually only univariate or small-scale multivariate models are considered. Yet, data are now readily available for a very large number of macroeconomic variables that are potentially useful when forecasting. Hence, in this paper we construct a large macroeconomic data-set for the UK, with about 80 variables, model it using a dynamic factor model, and compare the resulting forecasts with those from a set of standard time series models. We find that just six factors are sufficient to explain 50% of the variability of all the variables in the data set. Moreover, these factors, which can be considered as the main driving forces of the economy, are related to key variables such as interest rates, monetary aggregates, prices, housing and labour market variables, and stock prices. Finally, the factor-based forecasts are shown to improve upon standard benchmarks for prices, real aggregates, and financial variables, at virtually no additional modelling or computational costs.
This paper studies within-family decision making regarding investment in income protection for surviving spouses using a simple and tractable Nash-bargaining model. A change in US pension law (the Retirement Equity Act of 1984) is used as an instrument to derive predictions from the bargaining model and to contrast these with the predictions of the classical single-utility-function model of the household. This law change gave spouses of married pension-plan participants the right to survivor benefits unless they explicitly waived this right. The classical view of household behavior predicts that this would have had no effect on choices, while the bargaining model predicts an increase in spousal survivor protection. In the empirical part of the paper, the predictions of the classical model regarding the amount of life-insurance protection and the likelihood of a pensioner selecting survivor benefits are rejected in favor of the predictions of the Nash-bargaining model. The paper thus provides evidence for the need to take the existence of multiple decision makers into account when studying household behavior.
This paper investigates time series methods for forecasting four Euro-area wide aggregate variables: real GDP, industrial production, price inflation, and the unemployment rate. We consider two empirical questions arising from this problem. First, is it better to build aggregate Euro-area wide forecasting models for these variables, or are there gains from aggregating country-specific forecasts for the component country variables? Second, are there gains from using information from additional predictors beyond simple univariate time series forecasts, and if so, how large are these gains, and how are these gains best achieved? It turns out that typically there are gains from forecasting these series at the country level, then pooling the forecasts, relative to forecasting at the aggregate level. This suggests that structural macroeconometric modeling of the Euro area is appropriately done at the country-specific level, rather than directly at the aggregate level. Moreover, our simulated out-of-sample forecast experiment provides little evidence that forecasts from multivariate models are more accurate than forecasts from univariate models. If we restrict attention to multivariate models, the forecasts obtained from a dynamic factor model appear to be somewhat more accurate than the other methods.
The rate of inflation in the US has declined from an average of 4.5% in the period 1960-79 to an average of 3.6% in 1980-98. Between those two periods, the standard deviations of inflation and the output gap have also declined. These facts can be attributed to the interaction of three possible factors: a shift in central bank preferences, a reduction in the variability of aggregate supply shocks and a more efficient conduct of monetary policy. In this paper we identify the relative roles of these factors. Our framework is based on the estimation of a small structural macro model for the US economy jointly with the first order conditions, which solve the intertemporal optimization problem faced by the Fed. Overall, our results indicate that the policy preferences of the Fed, and in particular the (implicit) inflation target, have changed drastically with the advent of the Volcker-Greespan era. In addition, we find that the variance of supply shocks has been lower and also monetary policy has been conducted more efficiently during this period.
Cross-country evidence on inflation and income inequality suggests that they are positively related. I explore the hypothesis that this correlation is the outcome of a distributional conflict underlying the determination of fiscal policy. I study a bargaining model of the political system in which inflation and inequality are positively correlated due to the relative vulnerability to inflation of low income households.
We examine whether standard monetary general equilibrium models with benevolent monetary authorities acting under discretion can generate persistent episodes of high and low inflation. Specifically, we ask whether private agents expectations of high or low inflation can lead them to take actions which then make it optimal for monetary authorities to validate these expectations. We find that this is the case for a large class of economies and that the result depends importantly on the properties of money demand.
In fact, the vast majority of the empirical evidence is based on the estimation of single-equation models and on the assumption that realized returns are a valid proxy for expected returns. A recent strand of the macroeconomic literature has analyzed monetary policy by including the central bank reaction function in small empirical macro models.
By simulating these models forward it is possible to derive the full forward path of short-term interest rates and hence to construct any long-term yields using model based forecasts. A test of the theory can then be performed by comparing observed long-term yield with those simulated and the associated 95 per cent confidence interval.
The application of this framework to the analysis of US term structure in the nineties does not
lead to the rejection of the expectations mode
Early retirement represents a persistent policy response to the appearance of a mass of redundant elderly workers, not entitled to a pension transfer. This distortionary policy reduces the incentive to accumulate human capital, and thus decreases economic growth. Why was it adopted? We suggest that alternative non-persistent policies, which do not introduce long-term distortions, but impose a larger cost on the current young generation of workers, were blocked by the political opposition of the high income workers, who did not plan to retire early, butsought to reduce the current tax burden, and of the middle income workers, who expect to retire early. What is the future of early retirement? We argue that, as the process of population aging reduces then performance of the PAYG system, the number of early retirees will diminish until, eventually, the political support in favor of this provision will disappear.
This paper studies kinship band networks as capital market institutions. It explores two of the channels through which membership in a community where individuals are genealogically linked, such as a kinship group, can affect their access to informal credit. The first is that incentives to default are lower for community members who can expect retaliation to fall on their offspring as well as on themselves (social enforcement). The second is that lenders prefer to lend to those members from whom they can expect reciprocation in the form of future loans for themselves or for their children (reciprocity). These two effects are incorporated in a theoretical framework with overlapping generations and tested using household-level data from Ghana.
When a firing litigation is taken to court, only the characteristics of the employees misconduct should be relevant for the judges decision. Using data from an Italian bank this paper shows that, instead, local labor market conditions influence the courts decision: the same misconduct episode may be considered sufficient for firing in a tight labor market but insufficient otherwise. We reach this conclusion after taking carefully into consideration the non-random selection of firing litigations for trial. Although these results refer to the specific situation considered, they raise more general issues. For macroeconomists they suggest that higher unemployment rates may increase firing costs via the effect on courts decision criteria; thus, the real extent of firing rigidities cannot be assessed without considering the role of courts. For labor law scholars, these findings are important because, following traditional principles, the law should be applied in the same way for all citizens and over the entire national territory.
This paper proposes a representation of (possibly) probabilistically unsophisticated preferences whereby (1) beliefs are jointly represented by a finitely additive probability measure and a vector-valued measure; (2) uncertain prospects are ranked according to the difference between a baseline expected utility evaluation and an adjustment term; and (3) the latter is the norm of the vector-valued expected utility of the prospect under consideration.Vector-valued measures are employed to represent the extent to which ambiguity about different events "cancels out" or "adds up", as revealed by the decision maker's preferences. The proposed representation, vector-adjusted expected utility (VEU), is shown to be consistent with the maxmin-expected utility model (MEU). A necessary and sufficient condition characterizing the class of VEU preferences within the MEU family of preferences is provided.
We wish to analyze the consequences of strategically sophisticated bidding without assuming equilibrium behavior. As a first step, we characterize interim rationalizable bids in first-price auctions with interdependent values and affiliated signals. We show that (1) every non-zero bid below the equilibrium is rationalizable, (2) some bids above the equilibrium are rationalizable, (3) the upper bound on rationalizable bids of a given player is a continuous, non-decreasing function of her signal/valuation. In the special case of symmetric bidders with independent signals and quasi-linear valuation functions, (i) the least upper bound on rationalizable bids is increasing and concave; hence (ii) rationalizability is consistent with substantial shading for high valuations, but only little shading for low valuations. Our main technical contribution is to show that the set of rationalizable bids is essentially determined by iteratively solving a simple one-dimensional optimization problem. We argue that our theoretical analysis may shed some light on experimental findings about deviations from the risk-neutral Nash equilibrium.
We investigate the effect of electoral rules and political regimes on fiscal policy outcomes in a panel of 61 democracies from 1960 and onwards. In presidential regimes, the size of government is smaller and less responsive to income shocks, compared to parliamentary regimes. Under majoritarian elections, social transfers are smaller and aggregate spending less responsive to income shocks than under proportional elections. Institutions also shape electoral cycles: only in presidential regimes is fiscal adjustment delayed until after the elections, and only in proportional and parliamentary systems do social transfers expand around elections. Several of these empirical regularities are in line with recent theoretical work; others are still awaiting a theoretical explanation.
The relationships between real wages, output per capita, inflation and unemployment in Italy between 1970 and 1994, are modelled using a cointegrated vector autoregression. There is evidence of a change in the underlying equilibria and in the dynamic evolution of the variables, probably associated with the substantial changes in many sectors of the Italian economy after 1979. Alternative ways to model structural change in the Italian labour market are considered. In adopting a split sample approach the results favour an hysteresis interpretation of unemployment.
Product and labor market deregulation are fundamentally about reducing and redistributing rents, leading economic players to adjust in turn to this new distribution. Thus, even if deregulation eventually proves beneficial, it comes with strong distribution and dynamic effects. The transition may imply the decline of incumbent firms. Unemployment may increase for a while. Real wages may decrease before recovering, and so on. To study these issues, we build a model based on two central assumptions: Monopolistic competition in the goods market, which de-termines the size of rents, and bargaining in the labor market, which determines the distribution of rents between workers and firms. We then think of product market regulation as determining both the entry costs faced by firms, and the degree of competition between firms. We think of labor market regulation as determining the bargaining power of workers. Having characterized the effects of labor and product market deregulation, we then use our results to study two specific issues. First, to shed light on macroecononomic evolutions in Europe over the last twenty years, in particular on the behavior of the labor share. Second, to look at political economy interactions between product and labor market deregulation.
A common finding in the empirical literature on the validity of purchasing power parity (PPP) is that it holds when tested for in panel data, but not in univariate (i.e. country specific) analysis. The usual explanation for this mismatch is that panel tests for unit roots and cointegration are more powerful than their univariate counterparts. In this paper we suggest an alternative explanation for the mismatch. More generally, we warn against the use of panel methods for testing for unit roots in macroeconomic time series. Existing panel methods assume that cross-unit cointegrating or long-run relationships, that tie the units of the panel together, are not present. However, using empirical examples on PPP for a panel of OECD countries, we show that this assumption is very likely to be violated. Simulations of the properties of panel unit root tests in the presence of long-run cross-unit relationships are then presented to demonstrate the serious cost of assuming away such relationships. The empirical size of the tests is substantially higher than the nominal level, so that the null hypothesis of a unit root is rejected very often, even if correct.
There is a wide literature on the dynamic adjustment of employment and its relationship with the business cycle. Our aim is to propose a statistical model that offers a congruent representation of post-war UK labour market. We use a cointegrated vector autoregressive Markov-switching model where some parameters change according to the phase of the business cycle. Output, employment, labour supply and real earnings are found to have a common cyclical component. The long run dynamics are characterized by two cointegrating vectors: trend-adjusted labour productivity and the labour share. Despite there having been many changes affecting this sector of the UK economy, the Markov-switching vector-equilibrium-correction model with three regimes representingm recession, growth and high growth provides a good characterization of the sample data over the period 1966(3)-1993(1) In an out-of-sample forecast experiment over the period 1991(2)-1993(1) it beats linear and non-linear model alternatives. The results of an impulse-response analysis highlight the dangers of using VARs when the constancy of the estimated coefficients has not been established.
The dramatic rise in the US social security and public health expenditure is only partially explained by the demographic trend, and may be due to the political complementarity between these two programs. We suggest that public health care increases the political constituency in favor of social security, and viceversa. Specifically, public health decreases the longevity differential between low and high-income individuals, therefore rising the retirement period, and the total pension benefits of the former relatively to the latter. This increases the political support for social security among the low-income young. We show that in a political equilibrium of a two-dimensional majoritarian election, a voting majority of low-income young and all retirees supports a large welfare state. Its composition between public health and social security is determined by intermediate (median) income types, who favor a combination of the two programs, since public health increases their longevity enough to make social security more attractive.
We construct and numerically solve a dynamic Heckscher-Ohlin model in which the initial distribution of production factors in the world makes world-wide factor price equalization impossible, and leads countries to group in two diversification cones. We study the dynamics of income components and factor prices. Our results suggest that the Ramsey model under complete specialization (CS) overcomes several shortcomings of its autarchy and factor-price-equalization (FPE) counterparts. In comparison with the autarchy model, it can account for important cross-sectional differences in income per capita growth rates without generating too large rental-rate differentials across countries. Furthermore, the CS model generates cross-country convergence in growth rates and levels along the transition towards the steady-state. Finally, the CS model converges to FPE in the long run. Unlike the autarchy model, FPE does not necessarily yield convergence in levels; however, international trade is beneficial to both countries in terms of welfare.
Is corruption systematically related to electoral rules? A number of studies have tried to uncover economic and social determinants of corrup-tion but, as far as we know, nobody has yet empirically investigated how electoral systems influence corruption. We try to address this lacuna in the literature, by relating corruption to different features of the electoral system in a sample from the late nineties encompassing more than 80 (de-veloped and developing) democracies. Our empirical results are based on traditional regression methods, as well as non-parametric estimators. The evidence is consistent with the theoretical models reviewed in the paper. Holding constant a variety of economic and social variables, we find that larger voting districts - and thus lower barriers to entry - are associated with less corruption, whereas larger shares of candidates elected from party lists - and thus less individual accountability - are associated with more corruption. Altogether, proportional elections are associated with more corruption, since voting over party lists is the dominant effect, while the district magnitude effect is less robust.
This paper studies whether the Heckscher-Ohlin models condition for factor price equalization holds. For this purpose information on national factor endowments and sectoral income shares is used to construct a theory based quantitative criterion. In the context of two production factors, capital and labor, it is shown that the whole world cannnot be a unique diversification cone, since the factor endowments of countries vary too much relative to the factor intensities of industries. The factor endowments of OECD countries instead are such that they can be under factor price equalization. These results cast doubts on the validity of the FPE model in a favor of the complete specialization model both concenrning empirical research on the net factor content of trade, and as an analyticial workhorse to study many aspects of international trade, economic growth, etc. for large cross-sections of countries.
In this paper we jointly estimate a forward-looking reaction function for the three-month rate alongwith a term structure relationship linking the six-month interest rates to current and expected future three-month rates. In our empirical model the response of the six-month interest rates to current and future three-month interest rates is allowed to depend on uncertainty on monetary policy. The expectations theory cannot be rejected in periods of low uncertainty on monetary policy.
The poor favor redistribution and the rich oppose it, but that is not all. The "prospect of upward mobility" (POUM) hypothesis implies that social mobility may make some of todays poor into tomorrows rich and since redistributive policies do not change often, individual preferences for redistribution should depend on the extent and the nature of social mobility. We estimate the determinants of preferences for redistribution using individual level data from the US, and we find that individual support for redistribution is negatively affected by the likelihood of moving above mean income relative to moving below the mean. Furthermore, people who believe that the American society offers equal opportunities to all oppose redistribution; instead those who do not believe that equal opportunities really exist and, therefore, regard the upward mobility process as biased, do not see social mobility as an alternative to redistributive policies.
This paper studies the border between shadow employment and unemployment, and argues that the two macroeconomic phenomena are two faces of the same coin, in the sense that any policy aimed at reducing the former will increase the latter. Theoretically, it proposes and solves a matching model of the labor market, where shadow employment emerges in equilibrium as the endogenous response of firms and workers who fell overburdened by taxes and regulations. While the model we propose neatly rationalize the labor market trade off implied by "shadow reducing policies", it suggests that economies with low unemployment turnover should be characterized also by low turnover along the shadow margins. Empirically, the paper uses matched records across LFSs (Labor Force Survey) to assess whether turnover over shadow employment is more stagnant in the high unemployment region of the Italian Mezzogiorno. Since existing estimates of shadow employment are silent on labor market flows and on the relation between shadow activity and main labor market aggregates, we perform original empirical work on the border between employment, unemployment and inactivity, and we find that Italian shadow employment has longer duration in regions with lower unemployment turnover.
This paper studies the impact of public infrastructure on economic perfor-mance. We employ three different methodologies to estimate the returns to public investment. First, we relate growth in total factor productivity to accumulation of public capital. Second, we assess the role of public capital as an input to production. Third, we evaluate the reduction in costs that can be attributed to the presence of public infrastructure. Using regional data for Italy, we find that the aggregate impact of public capital is positive and significant under the first approach, slightly negative under the second, and virtually zero under the third. More coherent results obtain when disaggregating by geographical area and time period: under all three approaches, the effectiveness of public investment seems to be increasing over time and to be higher in Central and Southern regions than in Northern ones.
The recent dismal performance of overall job creation has left Italy, as of the end of the 90s, with very low participation and high unemployment rates. Moreover, Italy exhibits a large regional dispersion of those variables when compared to similar European Union economies. The present paper, using Census data on employment from 784 Local Labor Systems (LLSs), covering the whole Italian territory, analyzes job creation and its determinants for the 1981-1996 period. Local characteristics (inputoutput linkages, pool of local workers, technological spillovers), technological diffusion and infrastructure provision affect productivity in each LLS and, lacking wage flexibility, they determine differences in job creation across them. We analyze those characteristics across Italian LLSs and regions, developing measures for each of them and then we estimate their impact on job creation. The sizable (0.8% a year) difference in employment growth between the Northeast and the Southwest, as well as the overall differences across LLSs are explained up to one third by those characteristics. In particular, strong local input-output linkages across industries and fast growing transport infrastructures are shown to be important determinants of job creation. The southern Italian economy emerges in this analysis as rather differentiated within itself. Some parts of the Southeast show current characteristics compatible with good job creation, particularly if helped by investment in infrastructures. Most of the Southwest, on the other hand, is still lacking local characteristics for self-sustained job creation and has been strongly penalized by the cut in public investment in the 90s.
This paper provides evidence on the behavior of public debt managers during fiscal stabilizations. Such episodes provide valuable information on the way debt instruments are chosen because they allow to overcome the problem that policymakers expectations of interest rates are generally not observable. We find that governments increase the share of fixed-rate long-term debt denominated in the domestic currency the higher is the conditional volatility of short-term interest rates, the lower are long-term interest rates, and the stronger is the fall in long-term rates that follows the announcement of the stabilization program. By contrast, conventional measures of the relative cost of issuing long-term debt, such as the long-short interest-rate spread, are not significant. This evidence suggests that debt managers tend to prefer long to short maturity debt because they are concerned about the risk of refinancing at higher than expected interest rates. However, when long-term rates are high relative to their expectations, they issue short maturity debt to minimize borrowing costs.
We contribute a novel approach to the existing literature on the effects of restructuring on R&D investment by focussing on a single industry, chemicals. The chemical industry is very research intensive and has experienced thorough restructuring since the early 1980s. By focussing on a single industry we are able to identify the technological and R&D features of its segments. This is important, since there is evidence that restructuring affects R&D differently in businesses with different technological features. However, no study so far has provided a systematic inquiry into this link. Using a panel of 535 European, American, and Japanese firms for the years 1987-1997 we find restructuring to be an important component in the observed changes in R&D intensity. We show that restructuring affects R&D both through changes in size and through changes in the composition of business portfolios, and that these effects differ across industry segments.
We combine growth theory with US Census data on individual schooling and wages to estimate the aggregate return to human capital and human capital externalities in cities. Our estimates imply that a one-year increase in average schooling in cities increases their aggregate labor productivity by 8 to 11 percent. We find no evidence for aggregate human capital externalities in cities however. Our main theoretical contribution is to show how aggregate human capital externalities can be identified when workers with different human capital are imperfect substitutes in production.
Since its the creation in 1997, more than 400 European firms have been listed on Euro.NM, the circuit of stock exchanges targeted at the financing of innovative firms in high-tech industries. We collect a unique database from the listing prospectuses and annual reports of these firms. We characterize their ownership and financial structures, and their economic activity. We show the existence of significative heterogeneity across firms and across the national segment of the Euro.NM circuit. Such differences persist also when we study the relationship between venture capital and the going-public process. We conclude that Euro.NM is far from providing a pan-European stock market for innovative, high-growth companies.
We show how the use of panel data methods such as those proposed in single equations by Kao (1999) and Pedroni (1999) or in systems by Larsson and Lyhagen (1999) to investigate economic hypotheses such as purchasing power parity or the term structure of interest rates may be affected by the existence of cross-unit cointegrating relations. The existing literature assumes that such relations, that tie the units of the panel together, are not present. Using empirical examples from a panel of OECD countries we show that this assumption is very likely to be violated. Simulations of the properties of panel cointegration tests in the presence of cross-unit relations are then presented to demonstrate the serious cost of assuming away such relations. Some fixes are proposed as a way of dealing with these more general scenarios.
This paper examines the interaction between public debt management and the design of monetary institutions. The analysis shows that delegation of monetary policy to an independent central bank is more effective in containing inflationary expectations than the use of foreign currency or inflation-indexed debt. If delegation of monetary policy is viable, the optimal policy is to issue conventional debt. This increases the sensitivity of taxes and output to unexpected inflation, thus minimizing the inflation needed to offset supply shocks. Evidence on central bank independence, debt composition and output variability suggests that the normative argument has some positive content.
While the return to growth in the US is largely credited to the rapid spreading of information technology, a key policy concern everywhere, and notably in Europe, is whether and when the US economic boom will extend abroad, and what role new technologies are about to play. In this paper, I collect and supplement data on the extent and the contribution to growth of new economy activities in Europe, and in a sample of OECD countries at large, in the 1990s. Available evidence indicates that capital accumulation in information technologies did make a contribution to growth in the EU too, though not equally everywhere. The contribution of new technologies was substantial in the UK and the Netherlands, and rapidly increasing over time in Finland, Ireland and Denmark. These were also the fast EU growing countries in the 1990s. New technologies contributed less in France, Germany, Belgium and Sweden, and marginally in Italy and Spain. Most of these countries were also slow growers. I conclude that the growth gaps between the EU and the US, as well as within the EU, can (also) be associated to the diverse pace of adoption of new technologies across countries.
The standard Real Business Cycle literature mainly focuses on Walrasian models designed to fit the US institutional framework. Differences between the US and Europe, mostly evident in the labor market, suggest that a purely Walrasian model may be inappropriate to study European business cycles. We present a stochastic version of the dynamic general equilibrium model in Daveri and Maffezzoli (2000), where unemployment is generated by monopolistic unions, and calibrate it to reproduce several long-run features of the Italian and US economies. The properties of our model are compared to the corresponding ones of Rogerson and Wrights indivisible labor model. We focus on the standard business cycle statistics, the impulse response functions, and the ability to reproduce the cyclical components of the main macroeconomic variables. We conclude that: (i) the business cycle statistics are observationally equivalent in small samples; (ii) the impulse response functions of the Monopoly Union (MU) model show a higher degree of overall persistence; (iii) the MU model enjoys a statistically significative advantage in reproducing the Italian business cycles, while its alternative seems to better explain the US business cycles.
The "Stability and Growth Pact" introduces deficit stabilization as a new interesting objective of debt management. The interest payments on public debt may serve as an important buffer against the budget consequences of cyclical downturns and unexpected deflation. The optimal debt composition depends on the correlations between interest rates, output and inflation. Estimated correlations for the period 1960-1998 and the implied debt compositions provide benchmarks for implications regarding the EMU. The paper explores how relevant correlations between output, inflation and interest rates may have changed with the shift in the monetary policy regime and thus how the debt composition, which stabilizes the deficit, has changed. A longer maturity structure of conventional debt is optimal if the ECB places a lower weight on output stabilization than the national monetary authorities and if EMU member states are hit by asymmetric shocks. Short term conventional debt should instead be issued by countries which experience a relatively higher output and inflation uncertainty and a lower sensitivity of aggregate demand to interest-rate changes. The optimal share of inflation-indexed debt is largest in a strict inflation targeting regime; the lower the weight that the ECB assigns to output stabilization, the more attractive is inflation indexation for deficit stabilization.
In this paper we concentrate on the consequences for the European stock market of a correction of the US Stock market. We explicitly consider the distinction between interdependence and contagion. We provide separate answers to the following questions: (i) is there long-term interdependence between US and Europe, i.e. does the equilibrium for European shares depend on the equilibrium for US shares ? (ii) Is there short-term interdependence and contagion between US and European stock markets, i.e do short term fluctuations of the US share prices spill over to European share prices and is such co-movement stable in occasion of the occurrence of high volatility episodes?
This paper is a general investigation of temporal aggregation in time series analysis. It encompasses traditional research on time aggregation as a particular case and extends the analysis to irregular intervals of aggregation. The Data Generating Process is allowed to evolve at regular, deterministic- irregular or even stochastic intervals of time (operational time). The time scale of this process is then transformed to generate the observational time process. This transformation can be deterministic (such as the familiar aggregation of monthly data into quarters) or more generally, stochastic (such as aggregating stock market quotes by the hour). In general, the observational time model exhibits persistence, time-varying parameters and non-spherical disturbances. Consequently, we review detection, specification, estimation and structural inference in this context, provide new solutions to these issues, and apply our results to high frequency, FX data.
This paper addresses the issue of whether and by how much public capital can enhance economic performance. We apply different methodologies to Italian regional data for the period 1970-1994. The results are presented for Italy as a whole and for different macroregions, and for individual categories of public capital. For the Center and the South, the methodologies employed indicate a positive contribution of infrastructure investment to TFP growth, output, and cost reduction. However, the magnitude of the cost reducing effect does not seem large enough to outweigh the social user cost of public capital. Also, we get mixed results on which types of infrastructure are most effective. Overall, investment in transportation appears to be the most productive: railways in the North and roads in the Center and South are the categories that mostly contributed to TFP growth.
This paper surveys some recent literature on fiscal policy and comparative politics. Economic policy is viewed as the outcome of a game with multiple-principals and multiple-agents. Opportunistic politicians bargain over policy. Rational voters hold them accountable through retrospective voting. Political institutions determine the rules for legislative bargaining and for electing politicians to office. The questions asked are: how do alternative electoral rules and alternative regime types shape the size of government, the composition of spending, the performance of politicians in terms of effort or corruption, the features of electoral cycles. The paper discusses both theory and evidence, and concludes with some speculations about directions for future research.
This paper investigates the determinants of group membership, and in particular the effect of income inequality on individual incentives to join economic groups. Drawing on a simple model, we show that an increase in inequality has an ambiguous effect and that the type of access rule (open versus restricted access) is key in determining what income categories are represented in the group. Furthermore, the shape of the income distribution can be crucial to determine whether increased inequality leads to more or less group participation. Using survey data from rural Tanzania we find that inequality at the village level has a negative impact on the likelihood that the respondents are members of any group. This effect is particularly significant for relatively wealthier people, both when relative wealth is "objectively" measured, and when it is "subjectively" defined. However, when we disaggregate groups by type of access rule, we find that inequality decreases participation in open access groups when there are wide disparities at the bottom of the distribution, while it increases participation in restricted access groups when the disparities are around the middle and top part of the distribution. Finally we assess the impact of inequality on various dimensions of group functioning.
We propose a general framework to study whether and how common trends and common cycles are still present when the original variables are linearly aggregated or only a subset of them is analysed. This is particularly important because of the adoption in empirical analysis of aggregated data on a limited number of variables.
This paper develops tests for selection of competing non-linear dynamic models. The null hypothesis is that the models are equally close the Data Generating Process (DGP), according to a certain measure of closeness. The alternative is that one model is closer to the DGP. The models can be non-nested, overlapping, or nested. They can be correctly specified or not. Their parameters can be estimated by a variety of methods, including Maximum Likelihood, Non-Linear Least Squares, Method of Moments, where the choice depends on the selected measure of closeness to the DGP. The tests are symmetric and directional. Their asymptotic distribution under the null is either normal or a weighted sum of chi-square distributions, depending on the nesting characteristics of the competing models. The comparison of ARMAX and STAR models, and of nested ARMAX-GARCH models are discussed as examples.
The increasing literature on the interactions between liberalisation-integration of product markets and labour market reforms is often highly speculative and draws on a rather weak empirical basis. Cross-country indicators of regulatory frameworks are often lacking, making it difficult to identify the linkages with observed outcomes in the labour and product markets. Moreover, empirical studies have often focused exclusively on the impact of certain labour market regulations, largely ignoring the role of product market regulations and the interactions between regulatory interventions in the two markets. As a result, while there are convincing theoretical arguments pointing to a potentially positive effect of product market liberalisation on labour market performance, empirical investigations of this issue are lacking. This paper aims at providing some preliminary evidence on these issues. In particular, the cross-country patterns and changing profile of product and labour market regulations are identified. Evidence on the relationships between product and labour market regulations is discussed in the context of other policies and institutional factors affecting the labour market; and the clustering and convergence of institutions across countries are characterised. More importantly, the paper reports evidence of a potentially significant impact of product and labour market regulations on employment and its composition. The evidence presented draws heavily on a novel set of cross-country indicators of regulation in the product and labour markets assembled at the OECD. It should be stressed at the outset that these indicators are preliminary estimates and should be taken only as rough approximations of the regulatory stance across OECD countries.
In the transitional phase towards full economic integration, European countries have the possibility of re-shaping the continental geography of specialization. We develop a two-sector two-country model that shows formally how fiscal policy can be critical in promoting specialization in a phase where increasing returns are strong enough to sustain agglomeration but local barriers are too high for agglomeration to arise endogenously. We show that, in this intermediate phase, the optimal policy is to levy asymmetric taxes on the two sectors in order to induce agglomeration and therefore welfare benefits to both countries.
I explore the dynamics of national production in a two-sector, two country model with cross-sector mobility and forward-looking agents, when trade costs fall or when the news of a boom in a sector is learned. Using the phase diagram method, introduced by Baldwin 1999 in this type of applications, I discover some important and interesting features of the equilibria and of their stability properties, which would have been completely overlooked by the "simple" static model as in Fujita et al. 1999. In particular I find out that, lacking comparative advantage, specialization may not take place at all labor market rigidities are too high, while the existence of comparative advantage ensures full specialization for intermediate values of the trade cost even in the presence of high labor market rigidities.
Europe is faced with serious problems of slow growth and little employment creation. Are the two problems related at all? Our proposed answer is: yes, they are. Building on Daveri and Tabellini (1997), we developed an infinite-horizon model with endogenous growth due to learning-by-doing and unemployment due to monopoly union bargaining in the labor market. In this framework, high labor and capital taxes and unemployment subsidies may in principle reduce employment and growth. The model is then calibrated using actual data from a variety of countries in Continental Europe, which we identify as the closest to our toy model. We run two types of balanced-budget fiscal policy experiments, focusing on their employment and growth effects .First, we separately change tax rates on capital, labor and subsidies, as well as replacement rates, while assuming that the government budget is kept balanced by appropriate changes in lump-sum trasnfers. Second, we cut labor taxes and adjust capital taxes in order to keep the GDP share of lump-sum transfers unchanged. Our numerical results suggest that, in the absence of binding revenue constraints, reducing labor taxes and unemployment subsidies is beneficial to both employment and growth, while capital taxes are less useful. if revenue constraints are binding, instead, cutting labor taxes is in general ineffective in boosting employment and growth.
The adjustment of labour markets during transition has been quite different from that anticipated by the Optimal Speed of Transition (OST) literature. In particular, it has involved stagnant unemployment pools, large flows to inactivity and strikingly low workers mobility especially when account is made of the changes occurring in the structure of employment by sector, occupation and ownership of firms.
Furthermore the policy trade-offs embedded in the OST literature relate mainly to the alternative between a big-bang strategy and a gradual transition process. This amounts to assuming that governments can control the pace of closure of state enterprises. However, the facts discussed in this paper suggest that separations from state sector employment were, ultimately, an endogenous variable rather than a policy instrument, as they were to a large extent the byproduct of voluntary choices of workers.
The Importance of innovation for the economic performance of industrialized countries has been largely stressed recently by the theoretical and empirical literature. Very few studies have carefully considered the determinants of European innovation, the productivity of its R&D and the existence of knowledge spillovers across regional boundaries. Here we develop a model which, emphasizing "the demand pull" as a key exogenous determinant of long-run innovation across regions, allows us to estimate the returns to regional R&D as a generator of innovation. We find that most of the cross-regional differences in innovation rates can be explained by own R&D, even after correcting for the endogeneity bias. Moreover, significant spillovers are found among geographically close regions, especially if they are technologically similar.
Returns to scale to capital and the strength of capital externalities play a key role for the empirical predictions and policy implications of different growth theories. We show that both can be identified with individual wage data and implement our approach at the city-level using US Census data on individuals in 173 cities for 1970, 1980, and 1990. Estimation takes into account fixed effects, endogeneity of capital accumulation, and measurement error. We find no evidence for human or physical capital externalities and decreasing aggregate returns to capital. Returns to scale to physical and human capital are around 80 percent. We also find strong complementarities between human capital and labor and substantial total employment externalities.
This paper studies both theoretically and empirically the determinants of group formation and of the degree of participation when the population is heterogeneous, both in terms of income and race or ethncity. We are especially interested in whether and how much the degree of heterogeneity in communities infuences the amount of participation in different types of groups. Using survey data on group membership and data on US localities, we find that, after controlling for many individual characteristics, participation in social activities is significatively lower in more unequal and in more racially or ethnically fragmented localities. We also find that those individuals who express views against racial mixing are less prone to participate in groups the more racially heterogeneous their community is.
We study the enforcement of competition policy against collusion under Leniency Programs, which give reduced fines to firms revealing information to the Antitrust Authority. Such programs give firms an incentive to break collusion, but may also have a pro-collusive effect, since they decrease the expected cost of misbehaviour. We analyze the optimal policy under alternative rules and with homogeneous and heterogeneous cartels, obtaining a ranking of the different schemes and showing when the use of reduced fines may improve antitrust enforcement.
Observed fiscal policy varies greatly across time and countries. How can we explain this variation across time and countries? This paper surveys the recent literature that has tried to answer this question. We adopt a unified approach in portraying public policy as the equilibrium outcome of an explicitly specified political process. We divide the material into three parts. In Part I, we focus on median-voter equilibria that apply to policy issues where disagreement between voters is likely to be one-dimensional. We thus study the general redistributive programs, which are typical of the modern welfare state: redistribution between rich and poor, young and old, employed and unemployed, resident of different regions, and labor and capital. In Part II we study special interest politics. Here the policy problem is multi-dimensional and we focus on specific political mechanisms: we study legislative bargaining, lobbying, and electoral competition, as well as the possible interactions between these different forms of political activity. Finally, Part III deals with a set of questions that can be brought under the label of comparative politics, as we deal with policy choice under alternative political constitutions: we model some styilized features of congressional and parliamentary political systems, focusing on their implications for rent extraction by politicians, redistribution and public goods provision.
In this paper we propose an approach to identify indipendently the parameters describing the structure of the economy from the parameters describing central bank preferences. We first estimate the parameters describing the structure of the US economy by considering a parsimonious specification for inflation, the output-gap and the commodity price index. We then proceed to the identification of central bank preferences by estimating by GMM the Euler equations for the solution of the intertemporal optimization problem relevant to the central banker. We then compare optimal and actual interest rate behavior to select a structure of central banks preferences. Our main results are as follows. First, persistence in interest rates could be explained by the structure of the economy. Second, "strict" inflation targeting dominates "flexible" inflation targeting. Third, the actual behavior of the policy rates cannot be described by the pure "strict" inflation targeting model, which would imply a much more aggressive monetary policy than the observed one. Fourth, when the inflation targeting model is extended to consider Brainard-type uncertainty and real interest rates smoothing, the latter is preferred hypothesis to reconcile actual and optimal interest rates behavior.
Allocative and redistributive rules in the public sector are often less contingent on available information than normative theory would suggest. This paper offers a political economy explanation. Under different rules, even if the observable outcomes of policies remain the same, the informational content which can be extracted by these observations is different. Simpler rules are more transparent because they allow citizens to gain more information on politicians. Since there are limits to what voters can observe, this may be a relevant insight into the functioning of the political system.
We study a model with free migration between a rich and a poor region. Since there is congestion, the rich region has an incentive to give the poor region a transfer in order to reduce immigration. Faced with free migration, the rich region voluntarily chooses a transfer, which turns out to be equal to that a social planner would choose. Provided migration occurs in equilibrium, this conclusion holds even in the presence of moderate mobility costs. However, large migration costs will lead to suboptimal transfers in the market solution.
The relationship between wages, prices, productivity, inflation, and unemployment in Italy, Poland, and the UK between the 1960's and the early 1990's is modelled as a cointegrated vector autoregression subject to regime shifts. For each of these economies there is clear evidence of a change in the underlying equilibria of this sector of the economy. Hypotheses concerning the similarity of the transition from a rigid to a flexible labour market are tested.
We analyze the relation between the intensity of electoral competition and the dissipation of political rents. In a model with perfectly informed and heterogeneous voters, two candidates commit to electoral platforms under a majority voting and winner-takes-all rule. If the proposed tax revenues exceed the cost of the public good, the winning candidate retains the surplus (political rents). The candidates are uncertain about voters preferences. If they do not know them ean of voters distribution (aggregate uncertainty), competition is relaxed and rents are positive. We then consider some extensions, as ideological positioning, increasing the number of candidates and imperfect commitment to the annouced policies.
We show that the standard condition for MSFE encompassing is no longer valid when the forecasts to be compared are biased. We propose a simple modification of such a condition and of tests for its validity. The relationship between these tests, pooling regressions and tests for non-nested hypotheses is also analysed, together with their multivariate versions. The teoretical results are illustrated by an empirical example on inflation and deficit forecasts, key variables for the formulation of monetary and fiscal policy.
This paper analyses two features of concern to policy-makers in the countries of the prospective of the European Monetary Union: the solvency of their government finances; and the accuracy of fiscal forecasts. Extending the existing methodology of solvency tests, the paper finds that, with few exceptions, EU governments are insolvent, albeit debt/GDP ratios show signs of stabilizing. The accuracy of official short-term fiscal forecasts (those of the OECD) is analysed using conventional techniques and found to be reassuring.
In this paper we suggest a framework to assess the degree of reliability of provisional estimates as forecasts of final data, and we reexamine the question of the most appropriate way in which available data should be used for ex ante forecasting in the presence of a data revision process. Various desirable properties for provisional data are suggested, as well as procedures for testing them, taking into account the possible nonstationarity of economic variables. For illustration, the methodology is applied to assess the quality of the US M1 data production process and to derive a conditional model whose performance in forecasting is then tested against other alternatives based on simple transformations of provisional data or of past final data.
We study the effects globalization on wage inequality. Our global economy resembles Rosen (1981) Superstars economy, where a) innovations in production and communication technologies enable suppliers to reach a larger mass of consumers and to improve the (perceived) quality of their products and b) trade barriers fall.When transport costs fall, income is redistributed away from the non-exporting to the exporting sector of the economy. As the former turns out to employ workers of higher skill and pay, the effect is to raise wage inequality. Whether the least skilled are stand to lose or gain from improved production or communication technologies, in contrast, depends on wether technology is skill-complement or substitute. The model gives an intuitive explanation for the empirical regularities that skill intensity, market size and wages tend to be positively associated to exporting activity, across sectors and plants.
The literature pioneered by Krugman (1991a) now known as "New economic geography" has developed very insightful models to understand phenomena as the agglomeration of economic activity and the specialization of regions. Nevertheless I think that the emphasis on the process of specialization, has been somewhat misleading both at a theoretical and empirical level. The attention of the literature has been focused on decreasing transport costs as the unique engine of the process. I develop a modified version of such models in which technological knowledge and its growth and spillovers are important forces at work, once agglomeration has taken place. I obtain the interesting result that after the dramatic tendency to specialization, driven by decreasing transport costs, local technological growth generates a tendency towards de-specialization, in the most advanced regions. This pattern fits the stylized facts relative to the last 40 years in the U.S. There, after a strong tendency towards industrial concentration, there has been a tendency, towards de-concentration. A first look at the data for European countries, for the last 30 years also shows a tendency to constant or slightly decreasing concentration of industries and de-concentration of innovative activity.
In an empirical analysis, considering 236 U.S. cities in the period 1980-1990, we document a strong positive correlation between local supply of education skills and their return. In SMSA's where the average education of workers is high the education premium is also high. This is true both considering the levels of the variables in 1980, 1990 and considering their changes. Technical progress, as well as physical capital investments, may be driven by local pressures to enhance the productivity of factors which are locally abundant. Therefore we may interpret this regularity as a sign that in cities where educated workers are abundant, firms will invest in skill-complementary machines and techniques. Acemoglou (1998) claims that this idea could explain the time evolution of education premia in the 80's. Here I bring some compelling evidence that it may provide an explanation for the behavior of education premia across cities.
We try to demonstrate how economists may engage in research on comparative politics, relating the size and composition of government spending to the political system. A Downsian model of electoral competition and forward-looking voting indicates that majoritarian---as opposed to proportional---elections increase competition between parties by focusing it into some key marginal districts. This leads to less public goods, less rents for politicians, more redistribution and larger government. A model of legislative bargaining and backward-looking voting indicates that presidential---as opposed to parliamentary---regimes increase competition between both politicians and voters. This leads to less public goods, less rents for politicians, less redistribution, and smaller government. We confront these predictions with cross-country data from around 1990, controlling for economic and social determinants of government spending. We find strong and robust support for the prediction that the size of government is smaller under presidential regimes, and weaker support for the prediction that majoritarian elections are associated with less public goods.
We search for the circumstances in which the response of national saving to fiscal policy contradicts conventional Keynesian predictions, using data from 18 OECD countries. The data suggest that non-Keynesian effects are associated with large and persistent fiscal impulses. Such responses can be traced to changes in taxes and transfers, more than to changes in government consumption, and are stronger for fiscal contractions than expansions. During large contractions an increase in taxes has no effect on national saving. High or rapidly growing public debt is not a good predictor of non-Keynesian effects. Finally, the composition of the fiscal impulse matters: the non-Keynesian effects of a large fiscal contraction are enhanced when this is carried out primarily by raising taxes.
Exogenous measures of monetary policy shocks, directly derived from financial market information, are used in close (US) and open (US-Germany) economy VAR models to evaluate the robustness of the dynamic effect of monetary policy obtained from traditional identified VAR. The empirical analysis confirms the main features of the monetary policy transmission mechanism in US and Germany, explicitly addressing the issue of simultaneity between the German policy interest rate and the US dollar-DMark exchange rate.
There exists a continuum of prices between Bertrand and joint-profit maximization prices which can be interpreted as the outcome of a two-stage game where firms first invest to increase product differentiation and then compete in prices. The lower the costs of differentiating their products from each other the more relaxed competition in the product market and the closer firms will be to the collusive outcome of the one-shot game for given degree of differentiation. The higher the costs the harsher competition in the market and the closer to the Bertrand solution of the one-shot game with given degree of differentiation.
The empirical VAR literature on the monetary transmission mechanism in closed economies has been successful in providing evidence with which theoretical models of the monetary transmission mechanism are now confronted. The empirical VAR literature on the monetary transmission mechanism in open economies has not enjoyed the same success and it is still marred with a number of empirical puzzles. In this paper we firstly assess the relevance of the progress made estimating VAR in closed economies for the specification of VAR in open economies. Second, we propose to solve the simultaneity between exchange rate and policy interest rates by using information extracted from financial markets independently from the VAR. Lastly, we evaluate the relative importance of macroecomnomic and monetary policy variables in explaining short-term fluctuations in the nominal exchange rates. Our main results are that a commodity price index is an important variable in any VAR analysis of the monetary transmission mechanism, that the simultaneity between German policy rates and the US dollar/D mark exchange rate is not an empirically relevant problem, and that monetary factors are dominated by macroeconomic factors for the explanation of exchange rate fluctuations.
This paper evaluates VAR models designed to analyze the monetary policy transmission mechanism in the United States by considering three issues: specification, identification, and the effect of the omission of the long-term interest rate. Specification analysis suggest that only VAR models estimated on a single monetary regime feature parameters stability and do not show signs of mis-specification. The identification analysis shows that VAR-based monetary policy shocks and policy disturbances identified from alternative sources are not highly correlated but yeld similar descriptions of the monetary transmission mechanism. Lastly, the inclusion of the long-term interest rate in a benchmark VAR delivers a more precise estimation of the structural parameters capturing behaviour in the market for reserves and shows that contemporaneous fluctuations in long-term interest rates are an important determinant of the monetary authoritys reaction function.
The primary objective of this paper is to develop a political economy of public funding of education that accounts for the large disparities observed across countries in the share of GNP allocated to public education. In a general equilibrium overlapping generations model in which parents care about their childrens lifetime utility the rational and forward looking agents vote for a level of public funding of education. The model mirrors the observed cross-country disparities in the share of GNP allocated to public funding of education. This share increases with per capita income levels as well as with the fertility rate and it decreases with the degree of inequality in the economy. For higher levels of inequality the model can generate a politico-economic equilibrium where private and public investment on education coexist. In contrast to existing theories the paper does not assume that the factor prices are invariant and I study the importance of the effects of an education policy on the factor prices in the determination of the equilibrium level of this policy.
In this paper we analyze how the creation of a single currency regime changes the strategic relationship between policy makers, both within and across countries. in particular we look at the role of cross-country externalities and lack of commitment. When labor taxation is excessive, due to terms of trade externalities, the ECB may be tempted to raise inflation above the flexible exchange rate equilibrium in order to induce governments to substitute seignorage for income taxes. Therefore the equilibrium rate of inflation in EMU typically exceed the flexible exchange rate level. When the ECB cannot credibly commit to inflation, multiple equilibria may arise, where inflation is excessive and labor taxes too low (Workers Europe), or viceversa, where taxation is excessive and inflation too low(Bankers Europe). Finally, if the ECB cannot commit to a fixed scheme for redistributing seignorage, the outcome is excess inflation and suboptimal taxation. Both governments anticipate that the ECB will redistribute seignorage in favor of the country with lower tax revenue, and tend to lower tax rates accordingly.
The delegation of monetary policy to a supranational central bank creates a conflict of interest between residents of different countries. For example, the country in recession may favor more inflation to boost output, while the country in boom prefers exactly the opposite.This conflict gives rise to an adverse selection problem. Provided each government has private information about the current state of the economy, it may try to exploit it in order to shift the common monetary policy to his own preferred way. The paper shows that problems of this kind can generate both an inflation and primary deficit bias (in line with the worries of Workers Europe addressed by the "stability pact") as well as an excess monetary discipline and recession bias (in line with the worries addressed by the Bankers Europe concern).When information problems are particularly severe, monetary and fiscal policy becomes relatively insensitive to business cycle conditions, and too little "smoothing" is done over the business cycle.
Voting Theory generally concludes that -in first-past-the-post elections- 1) All voters should go to effective candidates (Duvergers Law); 2) Parties platform should converge (Median Voter Theorem). Observations, though, suggest that such predictions are not met in practice. We show that divergence and dispersion of votes is a natural election outcome when there is uncertainty and repetition of elections. "Voting for Losers" increases the informational content of elections, and forces main parties to relocate towards extremists. As a result, they maximize their probability of being elected, not by converging to the median but by diverging to a certain extent. Ideological behavior results then from optimizing considerations alone.
Oxford Economic Papers, forthcoming, 1999.
Aggregate data from the regions of Southern Italy are used to test whether risk is a significant determinant of the decision to migrate abroad or inside the country. This indeed appears to be the case for both foreign and domestic migrations, after controlling for unemployment and wage differentials and other plausible control variables. We interpret our results as evidence that, whereas financial markets are absent or malfunctioning, migration provides a shelter against uncertain income prospects.
In spite of ongoing dramatic changes in labor market structure, we present statistical evidence that transitional economies display rather low worker flows across sectors and occupations. Such low mobility can be explained by low returns to job changes as well as by market segmentation in the allocation of job offers. We develop an econometric model which enables us to characterize intertemporal changes in probabilities of dismissal, remuneration, and offer arrival rates on the basis of information on observed transitions and wage payments. The model is estimated using data from the Polish Labor Force Survey. Our results indicate a significant degree of segmentation in the allocation of job offers, more stability in public sector versus private sector jobs, and little, if any, rewards to tenure and age in the private sector. These findings support explanations for low mobility in transitional economies, which are based on informational failures, notably that fact that job offers do not reach those who are most prone to take up jobs, and that moving from public to private enterprises is costly, especially for those with high levels of job tenure and labor market experience in the public sector.
To the layman, the upward trend in European unemployment is related to the slowdown in economic growth. We argue that the laymans view is correct. The increase in European unemployment and the slowdown in economic growth are related, because they stem from a common cause: an excessively high cost of labor. In Europe, labor costs have gone up for many reasons, but one is particularly easy to identify: higher taxes on labor. If wages are set by strong and centralized trade unions, an increase in labor taxes is shifted onto higher real wages. This has two effects. First, it reduces labor demand, and thus creates unemployment. Second, as firms substitute capital for labor, the marginal product of capital falls ; over long periods of time, this in turn diminishes the incentive to accumulate and thus to grow. Thus high unemployment is associated to low growth rates. The model also predicts that the effect of labor taxation differs sharply in countries with different labor market institutions. We test these predictions on data for 14 industrial countries between 1965 and 1991, and find striking support for them. In particular, labor taxes have a strong positive effect on unemployment only in Europe and not in other industrial countries. The observed rise of 9.4 percentage points in labor tax rates can account for a reduction of the EU growth rate of about 0.4 percentage points a year - about one third of the observed reduction in growth between 1965-75 and 1976-91 - and a rise in unemployment of about 4 percentage points.
Handbook of Monetary Economics, Vol. III, Ed. by J. Taylor and M. Woodford, North Holland, 1998
This paper surveys the recent literature on the theory of macroeconomic policy. We study the effect of various incentive constraints on the policy making process, such as lack of credibility, political opportunism, political ideology, divided government. The survey is organized in three parts: Part I deals with monetary policy in a simple Phillips curve model, and focuses on credibility, political business cycles, and optimal design of monetary institutions. Part II deals with fiscal policy in a dynamic general equilibrium set up; the main topics covered in this section are credibility of tax policy, and political determinants of budget deficits. Part III studies economic growth in models with endogenous fiscal policy.
We analyse the optimal antitrust enforcement against collusion under asymmetric information with a continuum of types. We focus on prudential deterrence, by imposing that expected fines cannot induce losses even off the equilibrium path. Due to incentive compatibility, efficient cartels enjoy positive rents even when prosecution is costless, created through reduced fines and price cost margins. In equilibrium this distortion is lower for more efficient types, while full collusion can be tolerated for high cost cartels. Moreover, regulation with positive transfers is better than antitrust enforcement, which however allows to implement more efficient outcomes than price caps.
European Economic Review, April 1998
Observed fiscal policy reflects the incentives embedded in political institutions. In this paper, we illustrate the effects of two general institutional features: separation of powers, which is common in Presidential-Congressional political systems, and legislative cohesion, which is typical of parliamentary systems. Compared to a simple legislative game, separation of powers brings about a smaller size of government and lower waste, whereas legislative cohesion induces a more equal distribution, but more waste and higher taxes.
This paper provides evidence on the behavior of public debt managers during fiscal stabilizations in OECD countries over the last two decades. We find that debt maturity tends to lengthen the more credible is the program, the lower is the long-term interest rate and the higher is the volatility of short-term interest rates. We show that this debt issuing strategy is consistent with optimal debt management if information bewteen the government and private investors is asymmetric, as it is usually the case at the outset of a stabilization attempt when private investors may lack full confidence in the announced budget cuts.
When financial markets are not fully developed large shareholders are an important feature of an efficient corporate governance system. Thanks to their (relative) financial strength, banks are good candidates to perform this leading role in the governance of firms. However, in the type of monitoring provided and in the strategies that they may choose, banks are affected by significant conflicts of interests: expecially when they exert power through proxy votes and they are important lenders of the firm.
We propose a general formal structure for symmetric information delegation games that encompasses many existing economic applications in the fields of oligopoly theory, the theory of the firm, strategic trade policy and international political economy. We prove that all individually rational allocations are implementable in delegation games with non separable utility. Secondly, we show that contract renegotiation and non observable contracts have similar effects only in particular cases. We prove that all the equilibria obtained when renegotiation is excluded are implementable as renegotiation proof equilibria, provided that the side transfer technology implies a dead-weight loss increasing in the size of the transfer.
The broadcasting industry is still very concentrated all over the world, after 15 years in which new technologies and public policies allowed to overcome the constraint of limited availability of frequencies on the radio spectrum. We argue that the monopolistic competition set up, traditionally used to analyze the broadcasting industry, does not fit the empirical evidence. Instead we analyze the free entry equilibrium in a multistage game in which the decision on program quality (attractiveness) is crucial and the associated fixed costs are endogenously determined. We show that concentration might arise in the long run even in large markets despite entry is free.
We present a model of electoral accountability to compare the public finance outcomes under a presidential-congressional and a parliamentary system. In a presidential-congressional system, contrary to a parliamentary system, there are no endogenous incentives for legislative cohesion, but this allows for a clearer separation of powers. These features lead to clear differences in the public finance performance of the two systems. A Parliamentary system has redistribution towards a majority, less underprovision of public goods, more waste and a higher burden of taxation, whereas a presidential-congressional system has redistribution towards a minority, more underprovision of public goods, but less waste and a smaller size of government.
European Economic Review, 1999 (forthcoming)
This paper analyses how to extract market expectations from asset prices, with a particular example: using the term structure of interest rates to estimate the probability the market attaches to the event that a country, Italy, joins the European Monetary Union at a given date. The extraction of such a probability from the term structure is based on the presumption that the term structure contains valuable information regarding the markets assessment of a countrys chances to join the EMU. The case of Italy is interesting because in the survey regularly conducted by Reuters the probability of joining EMU in 1999 fluctuated between 0.07 and 0.15, while, during the same period, the measures of computed by financial houses -- also based on the term structure of interest rates -- have ranged between 0.5 and 0.8. The paper proposes a new method for computing these probabilities, and shows that the discrepancies between survey and market-based measures are not the result of market ine fficiencies, but depend on an incorrect use of the term structure to compute probabilities. The technique proposed in the paper can also be used to distinguish between convergence of probabilities and convergence of fundamentals, that is to find out whether an observed reduction in interest rate spreads signals a higher probability of joining EMU at a given time, or simply reflects improved fundamentals.
This paper analyses the dynamics of wives labour force participation in Spain during the late 1980s from a non-parametric descriptive perspective. This research is motivated by two basic facts: One, there is evidence that female labour supply behaviour in Spain is changing since the late 1980s. Two, while the analysis of participation stocks is covered in the literature, there is no published research on mobility or flows. In the first part of this paper there is a description of the three-monts transition rates over two-waves. The underlying assumption is the First Order Markov Hypothesis. In the second part, the Markov assumption is questioned. This is done by carrying out an analysis of survival over 7 waves in which re-entries are ignored. Moreover, there is also an analysis of mobility contingent on past labour market state, which includes re-entries in the analysis. This allows me to study the likelihood of relapsing in a particular state, or the likelihood of surviving contingent on past labour market states. The results are interesting because they reveal features of female labour market behaviour unknown to date.
We show how to extend the construction of infinite hierachies of beliefs (Mertens and Zamir (1985), Brandenburger and Dekel (1993)) from the case of probability measures to the case of conditional probability systems (CPSs) defined with respect to a fixed collection of relevant hypotheses. The set of hierarchies of CPSs satisfying common certainty of coherency conditional on every relevant hypothesis corresponds to a universal type space. This construction provides a unified framework to analyze the epistemic foundations of solution concepts for dynamic games. As an illustration, we derive some results about conditional common certainty of rationality and rationalizability in multistage games with observed actions.
I include the variables wives age and cohort and children in a participation equation to explore how the following two economic issues affect participation. First, a structural change in terms of participation over the life-cycle. Because a structural change does not affect all women of the young cohorts, I distinguish between long-run participating women (i.e. those whose participation behaviour resembles that found after the structural change) and a priori inactive women (i.e. those with a traditional behaviour). Second, it explores the impact of current social policies on mothers participation. Despite that a negative correlation between children and mothers participation (especially pre-scholars) is considered a stylized fact in the literature, long-run participating women may not withdraw from the labour market after maternity to avoid the likely experience loss (i.e. real wage decline) due to long absences. This analysis is carryed out by exploiting a longitudinal Spanish survey (the ECPF). Despite some lacking variables, the use of panel data methods yields to satisfactory results.
Much of the recent growth and development literature is based on the notion that economies may exhibit multiple equilibria, due to coordination failures. Surprisingly, little attention has been given to analyze which economic institutions may solve such failures. We examine the role of banks as 'catalysts for industrialization. When there are limits to contracting, and complementarities exist among investments of different firms, we derive coordination costs endogenously and show that banks can acts as catalysts provided that: (i) they are sufficiently large to mobilize a critical mass of firms, and (ii) they possess sufficient market power to make profits from coordination. We also show that the costs of coordination depend critically on the contracting instruments available to banks. In particular, allowing banks to hold equity reduces and sometimes eliminates the cost of coordination. We use our results to interpret the patterns of early industrialization of Belgium, Germany, and Italy in the late 19th century. These countries experienced quick industrialization with the active involvement of large and powerful universal banks, which engaged in both debt and equity finance.
Quo Vadis Europe, Ed. by H. Sibert, Kiel
At the core of the ongoing political and academic debate on European integration lies a fundamental question: what is the appropriate assignment of policy tasks to different levels of government? This paper asks what economic theory has to say about this normative problem. Our starting point is traditional economic theory, which approaches the question of policy assignment from the perspective of social welfare maximization by a Pigovian benevolent planner. Then, we discuss the political economics approach to this same question. Two themes run through the paper. The first theme is that, when allowing for political economy considerations, straightforward normative conclusions on the appropriate degree of centralization are much more difficult to draw. The second theme relates to the existence of complementarities between policy dimensions. Complementarities imply that, in the absence of clear constitutional safeguards, the process of European integration is unstable and fragile. We conclude with a discussion of how to combine flexibility and commitment in the process of European integration.
Quarterly Journal of Economics, November 1997
Political constitutions are incomplete contracts and therefore leave scope for abuse of power. In democracies, elections are the primary mechanism for disciplining public officials, but they are not sufficient. Separation of powers between executive and legislative bodies also helps preventing the abuse of power, but only with appropriate checks and balances. Checks and balances work by creating a conflict of interests between the executive and the legislature, yet requiring both bodies to agree on public policy. In this way, the two bodies discipline each other at the voters advantage. Under appropriate checks and balances, separation of powers also helps the voters elicit information.
This paper measures the relation between job flows and stablishment size applying econometric techniques best suited for analysing the dynamics of large cross-section. Using a balanced panel from the Mexican Manufacturing sector, it shows that, in line with cross-country evidence, initially small firms create proportionally more jobs than large firms. Since these results suffer from regression toward the mean, the paper applies an alternative technique and it does not find long-run tendency of small establishment to converge toward the mean. Furthermore, it shows how cross-sectional dynamics varies across industries and how it is linked to gross and net flows in each sector. We observe convergence to the mean in relatively stable sectors and asymmetric dynamic behaviour between expanding and declining industries.