Working papers results

There has been a lot of interest recently in developing small scale
rule-based empirical macro models for the analysis of monetary policy.
These models, based on the conventional view that inflation
stabilization should be a concern of monetary policy only, have typically neglected
the role of fiscal policy. We start with the evidence that a baseline
VAR-augmented Taylor rule can deliver recurrent mispredictions of
inflation in the U.S. before 1987. We then show that a fiscal feed-back rule, in
which the primary deficit reacts to both the output gap and the
government debt, can well characterize the behavior of fiscal policy throughout the
sample. However, by employing Markov-switching methods, we find
evidence of substantial instability across fiscal regimes. Yet this precisely happens
\QTR{it}{before 1987}. We then augment the monetary VAR\ with a
fiscal policy rule and control for the endogenous regime switches for both
rules. We find that only over time windows belonging to the pre-1987 period
the model based on the two rules can predict the behavior of \ inflation
better than the one based just on the monetary policy rule. \QTR{it}{After
1987}, when fiscal policy is estimated to switch to a regime of fiscal discipline,
the monetary-fiscal mix can be appropriately described as a regime of
monetary dominance. Over this period a monetary policy rule based
model is always a better predictor of the inflation behavior than the one
comprising both a monetary and a fiscal rule.

Within a small open economy we derive a tractable framework for the analysis
of the optimal monetary policy design problem as well as of simple feedback
rules. The international relative price channel is emphasized as the one peculiar
to the open economy dimension of monetary policy. Hence flexibility in
the nominal exchange rate enhances such channel. We first show that a feature
of the optimal policy under commitment, unlike the one under discretion,
is to entail stationary nominal exchange rate and price level. We show that
this property characterizes also a regime of fixed exchange rates. Hence, in
evaluating the desirability of such a regime, this benefit needs to be weighed
against the cost of excess smoothness in the terms of trade. We show that
there exist combinations of the parameter values that make a regime of fixed
exchange rates more desirable than the discretionary optimal policy. When the
economy is sufficiently open, this happens for a high relative weight assigned to
output gap variability in the Central Bank's loss function and for high values of
the elasticity substitution between domestic and foreign goods. We draw from
this interesting conclusions for a modern version of the optimal currency area
literature.

Do fiscal policy variables - overall spending, revenue, deficits and
welfare-state spending - display systematic patterns in the vicinity of
elections? And do such electoral cycles differ among political systems?
We investigate these questions in a data set encompassing sixty democracies
from 1960-98. Without conditioning on the political system, we find
that taxes are cut before elections, painful fiscal adjustments are postponed
until after the elections, while welfare-state spending displays no
electoral cycle. Our subsequent results show that the pre-election tax cuts
is a universal phenomenon. The post-election fiscal adjustments (spending
cuts, tax hikes and rises in surplus) are, however, only present in
presidential democracies. Moreover, majoritarian electoral rules alone are
associated with pre-electoral spending cuts, while proportional electoral
rules are associated with expansions of welfare spending both before and
after elections.

We construct and numerically solve a dynamic Heckscher-Ohlin model which, depending
on the distribution of production factors in the world and parameter values, allows for
worldwide factor price equalization or complete specialization. We explore the dynamics
of the model under different parameter values, and relate our theoretical results to the
empirical literature that studies the determinants of countries' income per capita growth
and levels. In general, the model is capable of generating predictions in accordance with
the most important ndings in the empirical growth literature. At the same time, it
avoids some of the most serious problems of the (autarkic) neoclassical growth model.

In this paper we review the recent liberalization process in energy markets promoted by the European Commission in the late Nineties and implemented in all the member countries. The electricity and gas industries are characterized by a predominant role of network infrastructures, and by upstream and downstream segments that can be opened to competition. The key issues that must be addressed to design a liberalization plan include the horizontal and vertical structure of the industry, the access to the transport facilities, the organization of a wholesale market and the development of competition in the liberalized segments. We analyze the liberalization policies in the EU as a two step approach: the Directives and the national liberalization plans have focussed so far on the goal of creating a level playing field for new comers through Third Party Access to the network infrastructure, the unbundling of monopolized from competitive activities of the incumbent and the opening of demand. Today, within a heterogeneous picture, all the member countries are implementing this phase. The second step refers to the development of a competitive environment in the liberalized markets, a goal that requires, but is not implied by, the creation of fair entry conditions to new comers. The reduction of market power of the incumbent through divestitures and the entry process, and the design of the market rules are the crucial issues, and neither the Directives not the national plans have been in most cases very effective on this issue. As a result, while we can start appreciating the entry of new operators in both the electricity and the gas industry, the effects on consumers choice and final prices are rather limited, in particular in the gas industry. In the second part of the paper we move our attention to the Italian case, describing the national liberalization plans and the policy issues still opened. Both the electricity and the gas reforms are more advanced than the minimum standards required by the Directives, and include in some cases interesting innovations. In particular, the Bersani Decree on electricity requires capacity divestitures in the generation plans and adopts a proprietary unbundling of the transport network, while the Letta Decree on gas introduces antitrust ceilings and a very quick schedule towards complete demand opening. Among the more relevant open issues, in the electricity industry the incumbent firm can maintain a market share of 50% in generation, with likely distortions in the wholesale market. There are two possible ways out of this central problem: a "market solution" that requires further reductions in the generation capacity of the dominant firm and an improvement in transborder interconnection capacity together with the start up of the wholesale market; an "administrative solution" that tries to limit the effects of the incumbent market power on prices by assigning the foreign low cost energy to some categories of (large) customers and introducing bid caps on prices, while delaying the opening of the wholesale market. It is not clear which choice has been made by the Government, even if the latter emerges from many recent decisions. In the gas industry the insufficient unbundling of the dominant firm is the most serious obstacle to developing competition. The antitrust ceilings may even determine perverse effects, with the new firms acting as (upstream) customers and (downstream) competitors of the dominant firm. Moreover, the access to international transmission capacity seems a crucial issue. Finally, the nature of competition with take-or-pay contracts suggests that a wholesale market for gas would be necessary. The last open issues are institutional: we argue that the recent assignment of the energy policy at the regional level and the prospected reduction of independence of the energy authority are two institutional reforms with a very negative impact on the liberalization process.

We propose a theory of international agreements on product standards. The key feature of the model is that agreements are viewed as incomplete contracts. In particular, these do not specify standards for products that may arise in the future. One potential remedy to contractual incompleteness is a dispute settlement procedure (DSP) that provides arbitration in states of the world that are not covered by the ex ante agreement. We identify conditions under which a DSP can provide ex-ante efficiency gains, and examine how these gains depend on the fundamentals of the problem. Another potential remedy to contractual incompleteness is given by rigid rules, i.e. rules that are not product-specific. We argue that the nondiscrimination rule is the only rule of this kind that increases ex-ante efficiency for any probability distribution over potential products. Finally we show that, under relatively weak conditions, the optimal ex-ante agreement is structured in three parts: (i) a set of clauses that specify standards for existing products; (ii) a rigid nondiscrimination rule, and (iii) a dispute settlement procedure. Although the model focuses on the case of product standards, the analysis suggests a more general incomplete-contracting theory of trade agreements.

We study the effects on the optimal monetary policy design problem of allowing for deviations from the law of one price in import goods prices. We reach three basic results. First, we show that incomplete pass-through renders the analysis of monetary policy of an open economy fundamentally different from the one of a closed economy, unlike canonical models with perfect pass-through which emphasize a type of isomorphism. Second, and in response to efficient productivity shocks, incomplete pass-through has the effect of generating endogenously a short-run tradeoff between the stabilization of inflation and of the output gap. This holds independently of the measure of inflation being targeted by the monetary authority. Third, in studying the optimal program under commitment relative to discretion, we show that the former entails a smoothing of the deviations from the law of one price, in stark contrast with the established empirical evidence. In addition, an optimal commitment policy always requires, relative to discretion, more stable nominal and real exchange rates.

The extraordinary success of the U.S. economy and the parallel growth slowdown of the large European countries and Japan in the 1990s bear a simple rationale. The United States has eventually benefited from the effective adoption of information technologies. The introduction of the newly installed IT capital has not instead enhanced aggregate capital accumulation and TFP growth in Europe and Japan. At least on impact, IT capital has mainly displaced existing capital and methods of production rather than supplementing them. The limited growth-enhancing effects from information technologies in countries other than the United States have occurred in the IT-producing sectors, while the IT-using industries havecontributed the bulk of productivity gains in the United States.

This paper presents evidence on the geographical dimension of the IT revolution in the U.S. economy. BEA and Census data show that, although neither IT diffusion nor the productivity revival was geographically narrow, the matching of the two across the U.S. states has been far from perfect. The late 1990s productivity acceleration mostly occurred in those states specialized in the production of IT goods & services as well as of non-IT durable goods. When those states are excluded from the sample, the remaining states do not exhibit any significant acceleration in productivity. In particular, the association between productivity gains and IT use is at best weak at the state level. This contrasts with previous aggregate and sector evidence, where the importance of both IT production and use was stressed.

We derive a set of stylized facts on the effects of non-systematic fiscal policy in the four largest countries of the Euro area, and discuss their implications for the fiscal policy coordination debate, for the effectiveness of fiscal shocks in stabilizing the economies, and for the interaction of fiscal and monetary policy. We find relevant differences across countries in the effects of non-systematic fiscal policy, and substantial uncertainty about the size of these effects, which casts doubts on the possibility of a fiscal coordination. Moreover, expenditure shocks are usually rather ineffective in increasing output growth or reducing its volatility, and can require deficit financing. Tax policies also appear to have minor effects on output, and tax cuts could also require deficit financing. Finally, fiscal shocks appear to have an impact on interest rates, either direct or trough the output gap and inflation while, in general, the effects of monetary policy on disbursements and receipts seem to be minor.