Working papers results

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.

We document the presence of a trade-off between unemployment benefits (UB) and employment protection legislation (EPL) in the provision of insurance against labor market risk. Different countries' locations along this trade-off represent stable, hard to modify, politico-economic equilibria. We develop a model in which voters are required to cast a ballot over the strictness of EPL, the generosity of UBs and the amount of redistribution involved by the financing of unemployment insurance. Agents are heterogeneous along two dimensions:  imployment status - insiders and outsiders - and skills - low and high. Unlike previous work on EPL, we model employment protection as an institution redistributing among insiders, notably in favour of the low-skill workers. A key implication of the model is that configurations with strict EPL and low UB should emerge in presence of compressed wage structures. Micro data on wage premia on educational attainments and on the strictness of EPL are in line with our results. We also find empirical support to the substantive assumptions of the model on the effects of EPL.

Abstract

We study how public policy can contribute to increase the share of early stage and
high-tech venture capital investments, thus helping the development of active venture
capital markets. A simple extension of the seminal model by Holmstrom and Tirole
(1997) provides a theoretical base for our analysis. We then explore a unique panel of
data for 14 European countries between 1988 and 2001. We have several novel findings.
First, the opening of stock markets targeted at entrepreneurial companies positively
affects the shares of early stage and high-tech venture capital investments; reductions
in capital gains tax rates have a similar, albeit weaker, effect. Second, a reduction in
labor regulation results in a higher share of high-tech investments. Finally, we find no
evidence of a shortage of supply of venture capital funds in Europe, and no evidence
of an effect of increased public R&D spending on the share of high-tech or early stage
venture capital investments.

Abstract

The aim of this paper is to propose a new method for forecasting Italian
inflation. We expand on a standard factor model framework (see Stock and
Watson (1998)) along several dimensions. To start with we pay special
attention to the modeling of the autoregressive component of the inflation.
Second, we apply forecast combination (Granger (2000) and Pesaran and
Timmermann (2001)) and generate our forecast by averaging the predictions
of a large number of models. Third, we allow for time variation in parameters
by applying rolling regression techniques, with a window of three-years of
monthly data. Backtesting shows that our strategy outperforms both the
benchmark model (i.e. a factor model which does not allow for model
uncertainty) and additional univariate (ARMA) and multivariate (VAR)
models. Our strategy proves to improve on alternative models also when
applied to turning point prediction.

This paper integrates a theory of equilibrium unemployment into a monetary model
with nominal price rigidities. The model is used to study the dynamic response of the
economy to a monetary policy shock. The labor market displays search and matching
frictions and bargaining over real wages and hours of work. Search frictions generate unemployment in equilibrium. Wage bargaining introduces a microfounded real wage
rigidity. First, I study a Nash bargaining model. Then, I develop an alternative
bargaining model, which I refer to as right-to-manage bargaining. Both models have
similar predictions in terms of real wage dynamics: bargaining significantly reduces
the volatility of the real wage. But they have different implications for inflation
dynamics: under right-to-manage, the real wage rigidity also results in smaller
fluctuations of inflation. These findings are consistent with recent evidence
suggesting that real wages and inflation only vary by a moderate amount in
response to a monetary shock. Finally, the model can explain important features of
labor-market fluctuations. In particular, a monetary expansion leads to a rise in job
creation and to a hump-shaped decline in unemployment.

This paper explores the quantitative plausibility of three candidate explanations for the
European productivity slowdown with respect to the US. The empirical plausibility of the
common wisdom on the topic (the "IT usage" hypothesis) is found to crucially depend on
how IT-using industries are defined. If a narrow definition is chosen, the IT usage
hypothesis no longer explains the whole of the EU productivity slowdown but just about
55% of it, with the remaining part to be attributed to other factors than IT, as argued in the
IT irrelevance view. No room is left for IT-producing industries as another potential
vehicle for the US-EU productivity growth gap, instead.

Abstract

Financial intermediaries can choose the extent to which they want to be active
investors, providing valuable services like advice, support and corporate governance.
We examine the determinants of the decision to become an active financial
intermediary using a hand-collected dataset on European venture capital deals. We
find organizational specialization to be a key driver. Venture firms which are
independent and focused on venture capital alone get more involved with their
companies. The human capital of venture partners is another key driver of active
financial intermediation. Venture firms whose partners' have prior business
experience or a scientific education provide more support and governance. These
results have implications for prevailing views of financial intermediation, which largely
abstract from issues of specialization and human capital.

This paper discusses the recent literature on the role of the state in economic development.
It concludes that government incentives to enact sound policies are key to economic success.
It also discusses the evidence on what happens after episodes of economic and political
liberalizations, asking whether political liberalizations strengthen government incentives to
enact sound economic policies. The answer is mixed. Most episodes of economic
liberalizations are indeed preceded by political liberalizations. But the countries that have
done better are those that have managed to open up the economy first, and only later have
liberalized their political system.