Exports,Supply Constraints and Growth: An Investigation using Regional Data

In this work we first model the role of demand‐ and supply‐side factors (labour market adjustment, productive efficiency) in explaining economic growth. Empirically testing the model, we evaluate why different growth regimes may appear in the 20 Italian administrative regions. This exercise uses a two‐stage econometric approach. Estimates for the elasticity of manufacturing output to exports are obtained from regional time series: a significant long‐run relationship indicates the existence of a demand‐constrained growth regime. We then ascertain whether the regional dispersion of supply‐side factors has an impact on the regional dispersion of growth regimes. The empirical evidence supports our expectations of strong regional differences. Southern regions are less likely to display demand‐constrained regimes. In explanation of these differences, second‐stage analysis reveals that a strong role is played by such efficiency‐enhancing factors as technological innovation, bank diffusion and ‘social capital’. No role is found for labour market rigidities.     

Inflation Targeting,Recursive Inattentiveness,and Heterogeneous Beliefs

We consider a monetary authority that provides an explicit inflation target in order to align expectations with the policy objective. However, biased perceptions of the target may arise due to imperfect information flows. We allow agents to revise expectations over time and we model their recursive choice among prediction strategies as an optimization problem under rational inattention. We then investigate whether a simple policy rule can steer the economy toward the targeted equilibrium. Our findings suggest that determinacy under rational expectations may not be sufficient to reach the target. Instead, monetary policy should be fine‐tuned to correct agents' biased beliefs.     

Nonlinear Transmission of Financial Shocks: Some New Evidence

Financial shocks generate a protracted and quantitatively important effect on real economic activity and financial markets only if the shocks are both negative and large. Otherwise, their role is quite modest. Financial shocks have become more important for economic fluctuations after 2000 and have contributed substantially to deepening the recessions of 2001 and 2008. The evidence is obtained using a new econometric procedure based on a Vector Moving Average representation that includes a nonlinear function of the financial shock. This method is a contribution of the present work.     

VERTICAL RESTRAINTS UNDER ASYMMETRIC INFORMATION: ON THE ROLE OF PARTICIPATION CONSTRAINTS*

The impact on vertical contracting of a type‐dependent reservation utility is investigated within a sequential monopolies environment with asymmetric information. The welfare and private properties of contracts controlling both the retail price and the sales level are compared with those restricting only sales. When firms choose contracts non‐cooperatively, retail price restrictions are desirable for the upstream supplier although detrimental to consumers, whenever the retailer reservation utility has a relevant impact on optimal contracts. If this impact is relatively weak and contracts are chosen cooperatively, vertical price control fails to maximize firms' joint‐profit although it would be beneficial to consumers.     

When Credit Bites Back

Using data on 14 advanced countries between 1870 and 2008 we document two key facts of the modern business cycle: relative to typical recessions, financial crisis recessions are costlier, and more credit‐intensive expansions tend to be followed by deeper recessions (in financial crises or otherwise) and slower recoveries. We use local projection methods to condition on a broad set of macro‐economic controls to study how past credit accumulation impacts key macro‐economic variables such as output, investment, lending, interest rates, and inflation. The facts that we uncover lend support to the idea that financial factors play an important role in the modern business cycle.     

Credit Market Failures and Policy

In a simplified version of the Stiglitz and Weiss (1981) model of the credit market we characterize optimal policies to correct market failures. Widely applied policies, notably interest-rate subsidies and investment subsidies, are compared to the theoretical optimum.     

Monetary Policy and Stock Prices in an Open Economy

This paper studies monetary policy in a two-country model where agents can invest their wealth in both stock and bond markets. In our economy the foreign country hosts the only active equity market where also residents of the home country can trade stocks of listed foreign firms. We show that, in order to achieve price stability, the Central Banks in both countries should grant a dedicated response to movements in stock prices driven by relative productivity shocks. Determinacy of rational expectations equilibria and approximation of the Wicksellian interest rate policy by simple monetary policy rules are also investigated.