Working papers results
We analyze welfare maximizing monetary policy in a dynamic general equilibrium two-country
model with price stickiness and imperfect competition. In this context, a typical terms
of trade externality affects policy interaction between independent monetary authorities. Unlike
the existing literature, we remain consistent to a public finance approach by an explicit
consideration of all the distortions that are relevant to the Ramsey planner. This strategy entails
two main advantages. First, it allows an accurate characterization of optimal policy in an economy
that evolves around a steady state which is not necessarily efficient. Second, it allows to describe
a full range of alternative dynamic equilibria when price setters in both countries are completely
forward-looking and households' preferences are not restricted. We study optimal policy both in
the long-run and in response to shocks, and we compare commitment under Nash competition
and under cooperation. By deriving a second order accurate solution to the policy functions,
we also characterize the welfare gains from international policy cooperation.
Abstract
In this paper we concentrate on the hypothesis that the empirical
rejections of the Expectations Theory (ET) of the term structure of interest
rates can be caused by improper modelling of expectations. Our
starting point is an interesting anomaly found by Campbell-Shiller (1987),
when by taking a VAR approach they abandon limited information
approach to test the ET, in which realized returns are taken as a proxy for
expected returns. We use financial factors and macroeconomic information
to construct a test of the theory based on simulating investors'
effort to use the model in 'real time' to forecast future monetary policy
rates. Our findings suggest that the importance of fluctuations of risk
premia in explaining the deviation from the ET is reduced when some
forecasting model for short-term rates is adopted and a proper evaluation
of uncertainty associated to policy rates forecast is considered.
Employment protection legislations (EPL) are not enforced uniformly across the board. There are a number of exemptions to the coverage
of these provisions: firms below a given threshold scale and workers with temporary contracts are not subject to the most restrictive rovisions. This within country variation in enforcement allows to make inferences on the impact of EPL which go beyond the usual cross-country approach. In this paper we develop a simple model which explains why these exemptions are in place to start with. Then we empirically assess the effects of EPL on dismissal probabilities, based on a double-difference approach. Our results are in line with the predictions of the theoretical model. Workers in firms exempted from EPL are more likely to be laid-off We do not observe this effect in the case of temporary workers. There is no effect of the exemption threshold on the growth of firms.
We present a theoretical model of a parliamentary democracy, where
party structures, government coalitions and fiscal policies are endogenously
determined. The model predicts that, relative to proportional elections, majoritarian
elections reduce government spending because they reduce party
fragmentation and, therefore, the incidence of coalition governments. Party
fragmentation can persist under majoritarian rule if party supporters are
unevenly distributed across electoral districts. Economic and political data,
from up to 50 post-war parliamentary democracies, strongly support our
joint predictions from the electoral rule, to the party system, to the type of
government, and to government spending.
While there is consensus on the need to raise the time spent in the market by
European women, it is not clear how these goals should be achieved. Tax wedges,
assistance in the job search process, and part-time jobs are policy instruments that
are widely debated in policy circles. The paper presents a simple model of labour
supply with market frictions and heterogenous home production where the effects of
these policies can be coherently analysed. We show that subsidies to labour market
entry increases women's entrance in the labour market, but they also increase exits from
the labour market, with ambiguous effect on employment. Subsidies to part-time do
increase employment, but they have ambiguous effects on hours and market production.
Finally, reductions in taxes on market activities that are highly substitutable with home
production have unambiguous positive effects on market employment and production.
We examine a model of contracting where parties interact repeatedly and can contract
at any point in time, but writing enforceable contracts is costly. A contract can
describe contingencies and actions at a more or less detailed level, and the cost of writing
a contract is proportional to the amount of detail. We consider both formal (externally
enforced) and informal (self-enforcing) contracts. The presence of writing costs has important
implications both for the optimal structure of formal contracts, particularly the
tradeo. between contingent and spot contracts, and for the interaction between formal
and informal contracting. Our model sheds light on these implications and generates a
rich set of predictions about the determinants of the optimal mode of contracting.
This paper presents a simple model of imperfect labor markets with endogenous labor market participation and home production. We show that a two-sector economy (home and market) implies a three-state labor market when labor market imperfections take the form of an irreversible entry cost incurred by workers. This simple framework brings several results. First, it delivers an expression for the employment rate and as side-products, a measure of the unemployment rate and the size of the labour force. Second, it rationalizes several empirical works on the definition of unemployment in labor force surveys. Third, it derives endogenously all flows between three labour market states. Fourth, a calibration of the model rationalizes di.erences in employment rates: in the US., we find a market productivity premium of +30% and market frictions of -15% compared to France. Finally, the model is a very simple reduced form of search models with which it is fully consistent: the irreversible entry cost is the opportunity cost of search and depends on aggregate conditions.
The existing literature ignores the fact that in most European countries the
strictness of Employment Protection Legislation (EPL) varies across the firm size
distribution. In Italy firms are obliged to rehire an unfairly dismissed worker only
if they employ more than 15 employees. Theoretically, the paper solves a
baseline model of EPL with threshold effects, and shows that firms close to the
threshold are characterized by an increase in inaction and by a reluctance to
grow. Empirically, the paper estimates transition probability matrices on firm
level employment using a longitudinal data set based on Italian Social Security
(INPS) records, and finds two results. First, firms close to the 15 employees
threshold experience an increase in persistence of 1.5 percent with respect to a
baseline statistical model. Second, firms with 15 employees are more likely to
move backward than upward. Finally, the paper tests the effect of a 1990 reform
which tightened the regulation on individual dismissal only for small firms. It
finds that the persistence of small firms relative to large firms increased
significantly. Overall, these threshold effects are significant and robust, but
quantitatively small.
We consider a society that has to elect an official who provides a public service
for the citizens. Potential candidates differ in their competence and every potential
candidate has private information about his opportunity cost to perform the task
of the elected official. We develop a new citizen candidate model with a unique
equilibrium to analyze citizens' candidature decisions.
Under some weak additional assumptions, bad candidates run with a higher
probability than good ones, and for unattractive positions, good candidates freeride
on bad ones. We also analyze the comparative static effects of wage increases
and cost of running on the potential candidates' entry decisions.
This paper examines competition in a liberalized market, with reference to some key features of the natural gas industry. Each firm has a low (zero) marginal cost core capacity, due to long term contracts with take or pay obligations, and additional capacity at higher marginal costs. The market is decentralized and the firms decide which customers to serve, competing then in prices. We show that under both sequential and simultaneous entry, there is a strong incentive to segment the market: when take-or-pay obligations are still to be covered, entering and competing for the same customers implies low margins. If instead a firm is left as a monopolist on a fraction of the market, xhausting its obligation, it has no further incentive to enter a second market, where the rival will be monopolist as well. Hence, we obtain entry without competition. Antitrust ceilings do not prevent such an outcome while a wholesale pool market induces generalized competition and low margins in the retail segment.