Forecasting inflation and tracking monetary policy in the euro area: does national information help?

The ECB target is set in terms of the year on year growth rate of the euro area Harmonized Index of Consumer Prices. Nonetheless, a good deal of attention is given to national data by market analysts when they try to anticipate monetary policy moves. In this paper we use the Generalized Dynamic Factor Model to develop a set of core inflation indicators that, combining national data with area wide information, allow us to answer two related questions. The first is whether country specific data actually bear any relevance for the future path of area wide price growth, over and above that already contained in area wide data. The second is whether to track ECB monetary policy decisions it is useful to take into account national information and not only area wide statistics. Within our empirical framework we find that once area wide information is properly taken into account the contribution of national idiosyncratic developments is negligible.     

Does trade credit redistribution thwart monetary policy? Evidence from Italy

Italy is an ideal candidate for testing the credit view of the transmission mechanism because of a bank-centred financial structure, a sizeable trade debt, and an economy titled towards small firms. An empirical analysis of trade credit and debt on averaged panel data shows that small firms act as financially constrained and cycle-sensitive, whereas large ones aim at smoothing sales, adopt an integrated management of inventories and receivables and have a higher trade debt to purchases elasticity. On balance, the net trade credit channel does not, as implied by the credit view, shield small firms from a monetary squeeze.     

Fair Valuation of Equity-Linked Policies under Insurer Default Risk

Abstract

We consider the problem of computing the fair value of equity-linked policies with an interestrate guarantee when the insurer is subject to credit risk. The framework is developed based on modern financial theory using the no-arbitrage principle. In this context, an equity-linked policy is considered as a vulnerable contingent claim that expires before maturity if the firm asset value reaches a prespecified default threshold depending on the firm’s liabilities. We derive a closedform formula in a continuous-time environment to compute the fair value of the contract. We also develop a discrete-time model that allows us to address fair evaluation when the policy embeds a surrender option.     

A dynamic model of R&D competition

This study considers a dynamic model of R&D competition in a situation of no uncertainty with identical firms in a perfect foresight. We are going to find out about the effects of firms' absorptive capacity on R&D strategies in the presence of technological spillovers. The conditions for the existence and uniqueness of a feedback–Nash equilibrium on firms' R&D expense will be also discussed. Numerical simulations will show as the introduction of the absorptive capacity reduces the impact of spillovers degree on firms' R&D strategies.     

Growth and social capital: an evolutionary model

In this paper, we analyze the role of cooperation between firms through a model of growth and social capital. In a growth model à la Solow we incorporate the set of resources that a relational network has at its disposals, as a distinct production factor, and thus examine its dissemination through evolutionary type processes in firm interactions. Dynamic analysis of the model demonstrates that cooperation is able to increase the productivity of factors, fostering a higher rate of growth in the long term. The most significant result is that scarcity of social capital can produce a general collapse of the economic system in areas in which long term growth is usually sustained by the learning by doing and spillover of knowledge phenomena. This conclusion leads to reconsider the role of local development economic policies that should concentrate on activities that promote repeated interaction between firms proven to be cooperative or that encourage the formation of technological consortia.     

An Efficiency Analysis of Proposed State and Local Sales Tax Reforms

With few exceptions, state and local general sales and use taxes are levied primarily on tangible goods. Secular trends in production and consumption of goods and services, as well as legislated exemptions and exclusions, have eroded sales tax bases. A number of reforms designed to reduce base erosion have been proposed, including base broadening, conversion to a consumption tax, and wholesale replacement of sales taxes with income taxes. Each proposal has potential to shore up sales tax bases. From an economic perspective, the policy choice should turn on efficiency, equity, and simplicity. This paper reports on a computer analysis of efficiency effects. The results suggest that (i) base broadening can increase economic efficiency, (ii) converting to a consumption tax base dominates base broadening, (iii) replacing sales taxes with higher income taxes could produce large efficiency losses, (iv) base broadening could generate efficiency gains even if untaxed remote sales become a “sizable” fraction of total sales, and (v) even partial base broadening could produce sizable efficiency improvements.     

Morale hazard

We interpret workers’ confidence in their own skills as their morale, and investigate the implication of worker overconfidence on the firm's optimal wage-setting policies. In our model, wage contracts both provide incentives and affect worker morale, by revealing private information of the firm about worker skills. We provide conditions for the non-differentiation wage policy to be profit-maximizing. In numerical examples, worker overconfidence is a necessary condition for the firm to prefer no wage differentiation, so as to preserve some workers’ morale; the non-differentiation wage policy itself breeds more worker overconfidence; finally, wage compression is more likely when aggregate productivity is low.