Now in:
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.

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 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.