Working papers results

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.