Working papers results

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.

Abstract

This paper studies empirically the effects of and the interactions amongst economic and
political liberalizations. Economic liberalizations are measured by a widely used indicator
that captures the scope of the market in the economy, and in particular of policies
towards freer international trade (cf. Sachs and Werner 1995, Wacziarg and Welch 2003).
Political liberalizations correspond to the event of becoming a democracy. Using a
difference-in-difference estimation, we ask what are the effects of liberalizations on
economic performance, on macroeconomic policy and on structural policies. The main
results concern the quantitative relevance of the feedback and interaction effects
between the two kinds of reforms. First, we find positive feedback effects between
economic and political reforms. The timing of events indicates that causality is more
likely to run from political to economic liberalizations, rather than viceversa, but we
cannot rule out feedback effects in both directions. Second, the sequence of reforms
matters. Countries that first liberalize and then become democracies do much better
than countries that pursue the opposite sequence, in almost all dimensions.

We develop a structural model of a small open economy with gradual exchange rate pass-through and endogenous inertia in inflation and output. We then estimate the model by matching the implied impulse responses with those obtained from a VAR model estimated on Swedish data. Although our model is highly stylized it captures very well the responses of output, domestic and imported inflation, the interest rate, and the real exchange rate. However, in order to account for the observed persistence in the real exchange rate and
the large deviations from UIP, we need a large and volatile premium on foreign exchange.

Firing frictions and renegotiation costs affect worker and firm preferences
for rigid wages versus individualized Nash bargaining in a standard
model of equilibrium unemployment, in which workers vary by
observable skill. Rigid wages permit savings on renegotiation costs and
prevent workers from exploiting the firing friction. For standard calibrations,
the model can account for political support for wage rigidity
by both workers and firms, especially in labor markets for intermediate
skills. The firing friction is necessary for this effect, and reinforces
the impact of both turbulence and other labor market institutions on
preferences for rigid wages.