Working papers results

We explore the determinants of yield differentials between sovereign bonds in the Euro
area. There is a common trend in yield differentials, which is correlated with a measure
of the international risk factor. In contrast, liquidity differentials display sizeable heterogeneity
and no common factor. We present a model that predicts that yield differentials
should increase in both liquidity and risk, with an interaction term whose magnitude and
sign depends on the size of the liquidity differential with respect to the reference country.
Testing these predictions on daily data, we find that the international risk factor is consistently
priced, while liquidity differentials are priced only for a subset of countries and
their interaction with the risk factor is crucial to detect their effect.

This paper brings together two strands of the empirical macro literature:
the reduced-form evidence that the yield spread helps in forecasting output
and the structural evidence on the difficulties of estimating the effect of monetary
policy on output in an intertemporal Euler equation. We show that
including a short-term interest rate and inflation in the forecasting equation
improves the forecasting performance of the spread for future output but the
coefficients on the short rate and inflation are difficult to interpret using a
standard macroeconomic framework. A decomposition of the yield spread
into an expectations-related component and a term premium allows a better
understanding of the forecasting model. In fact, the best forecasting model for
output is obtained by considering the term premium, the short-term interest
rate and inflation as predictors. We provide a possible structural interpretation
of these results by allowing for time-varying risk aversion, linearly related
to our estimate of the term premium, in an intertemporal Euler equation for
output.

We study optimal monetary policy in two prototype economies with sticky prices and credit
market frictions. In the first economy, credit frictions apply to the financing of the capital stock,
generate acceleration in response to shocks and the financial markup (i.e., the premium on
external funds) is countercyclical and negatively correlated with the asset price. In the second
economy, credit frictions apply to the flow of investment, generate persistence, and the financial
markup is procyclical and positively correlated with the asset price. We model monetary policy
in terms of welfare-maximizing interest rate rules. The main finding of our analysis is that strict
inflation stabilization is a robust optimal monetary policy prescription. The intuition is that, in
both models, credit frictions work in the direction of dampening the cyclical behavior of inflation
relative to its credit-frictionless level. Thus neither economy, despite yielding different inflation
and investment dynamics, generates a trade-off between price and financial markup stabilization.
A corollary of this result is that reacting to asset prices does not bear any independent welfare
role in the conduct of monetary policy.

We provide a long term perspective on the individual retirement behavior
and on the future of early retirement. In a cross-country sample, we
find that total pension spending depends positively on the degree of early
retirement and on the share of elderly in the population, which increase
the proportion of retirees, but has hardly any effect on the per-capita pension
benefits. We show that in a Markovian political economic theoretical
framework, in which incentives to retire early are embedded, a political
equilibrium is characterized by an increasing sequence of social security
contribution rates converging to a steady state and early retirement. Comparative
statics suggest that aging and productivity slow-downs lead to
higher taxes and more early retirement. However, when income effects
are factored in, the model suggests that periods of stagnation - characterized
by decreasing labor income - may lead middle aged individuals to
postpone retirement.

Using a structural Vector Autoregression approach, this paper compares the
macroeconomic effects of the three main government spending tools: government
investment, consumption, and transfers to households, both in terms of the size
and the speed of their effects on GDP and its components. Contrary to a common
opinion, there is no evidence that government investment shocks are more
effective than government consumption shocks in boosting GDP: this is true both
in the short and, perhaps more surprisingly, in the long run. In fact, government
investment appears to crowd out private investment, especially in dwelling and in
machinery and equipment. There is no evidence that government investment pays
for itself in the long run, as proponents of the Golden Rule implicitly or explicitly
argue. The positive effects of government consumption itself are rather limited,
and defense purchases have even smaller (or negative) effects on GDP and private
investment. There is also no evidence that government transfers are more effective
than government consumption in stimulating demand.

This paper studies the effects of fiscal policy on GDP, inflation and interest rates
in 5 OECD countries, using a structural Vector Autoregression approach. Its main
results can be summarized as follows: 1) The effects of fiscal policy on GDP tend
to be small: government spending multipliers larger than 1 can be estimated only
in the US in the pre-1980 period. 2) There is no evidence that tax cuts work faster
or more effectively than spending increases. 3) The effects of government spending
shocks and tax cuts on GDP and its components have become substantially weaker
over time; in the post-1980 period these effects are mostly negative, particularly on
private investment. 4) Only in the post-1980 period is there evidence of positive
effects of government spending on long interest rates. In fact, when the real interest
rate is held constant in the impulse responses, much of the decline in the response
of GDP in the post-1980 period in the US and UK disappears. 5) Under plausible
values of its price elasticity, government spending typically has small effects on
inflation. 6) Both the decline in the variance of the fiscal shocks and the change
in their transmission mechanism contribute to the decline in the variance of GDP
after 1980.

Focusing on signaling games, I illustrate the relevance of the rationalizability
approach for the analysis multistage games with incomplete
information. I define a class of iterative solution procedures, featuring a
notion of forward induction: the Receiver tries to explain the Sender's
message in a way which is consistent with the Sender's strategic sophistication
and certain given restrictions on beliefs. The approach is applied to
some numerical examples and economic models. In a standard model with
verifiable messages a full disclosure result is obtained. In a model of job
market signaling the best separating equilibrium emerges as the unique
rationalizable outcome only when the high and low types are sufficiently
different. Otherwise, rationalizability only puts bounds on the education
choices of different types.

This paper suggests that the main (and possibly unique) source of β- and σ- convergence
in GDP per worker (i.e. labor productivity) across Italian regions over the
1980-2000 period is the change in technical and allocative efficiency, i.e. convergence
in relative TFP levels. To reach this conclusion, I construct an approximation of
the production frontier at different points in time using Data Envelope Analysis
(DEA), and measure efficiency as the output-based distance from the frontier. This
method is entirely data-driven, and does not require the specification of any particular
functional form for technology. Changes in GDP per worker can be decomposed
in changes in relative efficiency, changes due to overall technological progress, and
changes due to capital deepening. My results suggest that: (i) differences in relative
TFP are quantitatively important; (ii) while technological progress and capital
deepening are the main, and equally important, forces behind the rightward shift
in the distribution of GDP per worker, convergence in relative TFP is the main
determinant of the change in the distribution's shape.

We study the effects of model uncertainty in a simple New-Keynesian
model using robust control techniques. Due to the simple model structure, we
are able to find closed-form solutions for the robust control problem, analyzing
both instrument rules and targeting rules under different timing assumptions.
In all cases but one, an increased preference for robustness makes monetary
policy respond more aggressively to cost shocks but leaves the response to
demand shocks unchanged. As a consequence, inflation is less volatile and
output is more volatile than under the non-robust policy. Under one particular
timing assumption, however, increasing the preference for robustness has no
effect on the optimal targeting rule (nor on the economy).

The existing studies of unemployment benefit and unemployment duration suggest that reforms
that lower either the level or the duration of benefits should reduce unemployment. Despite the
large number of such reforms implemented in Europe in the past decades, this paper presents
evidence that shows no correlation between the reforms and the evolution of unemployment.
This paper also provides an explanation for this fact by exploring the
interactions between unemployment benefits and social assistance programmes. Unemployed
workers who are also eligible, or expect to become eligible, for some social assistance
programmes are less concerned about their benefits being reduced or terminated. They will not
search particularly intensively around the time of benefit exhaustion nor will come particularly
less choosy about job offers by reducing their reservation wages. Data from the European
Community Household Panel (ECHP) are used to provide evidence to support this argument.
Results show that, in fact, for social assistance recipients the probability of finding a job is not
particularly higher during the last months of entitlement.