Portfolio flows and the US dollar–yen exchange rate

This paper investigates the effects of portfolio flows on the US dollar–Japanese yen exchange rate changes over the period 1988:01–2011:04. Using a time-varying transition probability Markov-switching framework, the results suggest that the impact of portfolio flows on the dollar–yen exchange rate changes is state-dependent. In particular, the results show that portfolio inflows from Japan toward the US, more than monetary variables, strengthen the probability of remaining in the dollar–yen appreciation (low volatility) state. Therefore, credit controls on the flows can be used as a policy tool to pursue economic and financial stability.     

Certainty Independence and the Separation of Utility and Beliefs

Economists often operate under an implicit assumption that the tastes of a decision maker are quite stable, while his beliefs change with the availability of new information. We show that for a general class of preferences, a separation of a key component of tastes, the utility function, from the other components of the representation is possible only if the decision maker's preferences satisfy a mild but not completely innocuous condition, called ‘certainty independence’. We also outline the axiomatic characterization of the preferences that obtain such separation, which are a subset of the biseparable preferences.     

The time-varying independence of Italian peak judicial institutions

The paper investigates the stability of the degree of independence of the judiciary vis à vis both the classical political branches and other independent institutions, such as regulatory agencies, using evidence about the Italian Constitutional Court and the Council of State. Both peak judicial courts feature time varying factors of independence that affect their jurisprudence, especially in the case of the legitimacy review by the Constitutional Court. The less conclusive evidence found in the Council of State related to decisions of independent regulatory authorities might be due to the more complex set of interactions in which the Council operates.     

A Model of the Representation of Interests in a Compound Democracy

This paper provides a model of democratic government as a compound of independent elective and non elective centers of power that compete in fostering the demands of voters and of interest groups. The analysis describes how interests of voters and of pressure groups are represented and under what conditions the compound democracy is more responsive to voters' or to interest groups' demands. These conditions are shown to depend on the center of power's relative opportunity costs at serving a plurality of interests and on the severeness of informational asymmetries between voters and interest groups.     

Transatlantic Trade-Offs in the Age of Balanced Budgets and European Monetary Union

We develop a model of monetary and fiscal policies appropriate for considering U.S.-European policy interactions in an era of near-balanced budgets and European monetary union. We study the determinants of policy trade-offs and incentives for central banks and governments across the Atlantic. Smaller, more open economies face more favorable trade-offs, since openness enhances policy effectiveness via the exchange-rate channel. Changes in Europe's monetary arrangements do not affect U.S. trade-offs, although they alter the trade-offs facing European policy-makers. Fiscal trade-offs depend crucially on the extent to which fiscal policy is distortionary. Changes in taxes and spending move both employment and inflation in the desired direction following a worldwide supply shock when spending is financed with distortionary taxes.     

Global slack and domestic inflation rates: A structural investigation for G-7 countries

Recent papers have argued that one implication of globalization is that domestic inflation rates may have now become more a function of “global”, rather than domestic, economic conditions, as postulated by closed-economy Phillips curves.This paper aims to assess the empirical importance of global output in determining domestic inflation rates by estimating a structural model for a sample of G-7 economies. The model can capture the potential effects of global output fluctuations on both the aggregate supply and the aggregate demand relations in the economy and it is estimated using full-information Bayesian methods.The empirical results reveal a significant effect of global output on aggregate demand in most countries. Through this channel, global economic conditions can indirectly affect inflation. The results, instead, do not seem to provide evidence in favor of altering domestic Phillips curves to include global slack as an additional driving variable for inflation.     

Multivariate contemporaneous-threshold autoregressive models

This paper proposes a contemporaneous-threshold multivariate smooth transition autoregressive (C-MSTAR) model in which the regime weights depend on the ex-ante probabilities that latent regime-specific variables exceed certain threshold values. A key feature of the model is that the transition function depends on all the parameters of the model as well as on the data. Since the mixing weights are also a function of the regime-specific noise covariance matrix, the model can account for contemporaneous regime-specific co-movements of the variables. The stability and distributional properties of the proposed model are discussed, as well as issues of estimation, testing and forecasting. The practical usefulness of the C-MSTAR model is illustrated by examining the relationship between US stock prices and interest rates.     

Assessing financial distress dependencies in OTC markets: a new approach using trade repositories data

In this paper, we study the relationships among financial market sub-segments as a way to identify potential financial distress through increased co-movements among them. To study how sub-markets are mutually co-dependent, we combine granular data on over-the-counter derivatives by trade repositories and the joint probability of distress (JPoD) approach introduced by the International Monetary Fund. We define an indicator that combines several distress drivers and observe that results on co-dependencies are similar to those that would be expected: similarities between financial and contractual terms seem to be responsible for stronger co-movements among sub-markets. However, high values for JPoD even in correspondence of quite dissimilar sub-markets suggest the presence of other drivers that should be investigated in future research. To the best of our knowledge, this is the first empirical study on systemic risk assessment based on micro-founded trade repositories’ data on interest rate swaps.