Alessandro Notarpietro

Structural reforms and zero lower bound in a monetary union

We assess the short- and medium-term macroeconomic effects of competition-friendly reforms in the service sector when the monetary policy rate is stuck at the zero lower bound (ZLB) in a monetary union. We calibrate a large-scale multi-country multi-sector dynamic general equilibrium model to one region within the euro area, the rest of the euro area and the rest of the world. We find first, that unilateral reforms by a single country do not affect the number of periods for which the ZLB holds and have mild medium-term expansionary effects on GDP. Second, reforms simultaneously implemented in the entire euro area can favor an earlier exit from the ZLB if they have sufficiently inflationary effects, which happens when the gradual increase in the supply of goods and services is matched by a sufficiently large increase in investment, associated with higher expected levels of output. Reforms have expansionary effects because of their positive wealth effect, which more than counterbalances the recessionary substitution effect associated with higher real interest rates. If investment cannot immediately react to the reforms, then the latter has a deflationary impact and the duration of the ZLB is not reduced.

Euro Area and Global Oil Shocks: An Empirical Model-Based Analysis

We assess the impact of oil shocks on euro-area macroeconomic variables by estimating a new-Keynesian small open economy model with Bayesian methods. Oil price is determined according to supply and demand conditions in the world oil market. We find that the impact of an increase in the price of oil depends upon the underlying sources of variation: when the driver of higher oil prices is an increase in the rest of the worlds aggregate demand, both euro-area GDP and CPI inflation increase, whereas negative oil supply shocks and positive worldwide oil-specific demand shocks have stagflationary effects on the euro-area economy. Moreover, the increase in oil prices during the 2004-2008 period did not induce stagflationary effects on the euro-area economy because it was associated with positive aggregate demand shocks in the rest of the world. Similarly, a drop in world aggregate demand helps to explain the recent (2008) simultaneous drop in oil prices, euro-area GDP and inflation - particularly its fuel component.

Macroeconomic Effects of Simultaneous Implementation of Reforms after the Crisis

This paper evaluates the macroeconomic effects of simultaneously implementing fiscal consolidation and competition-friendly reforms in a country of the euro area by simulating a large-scale dynamic general equilibrium model. We find, first, that the joint implementation of reforms has additional expansionary effects on long-run economic activity. Increasing competition in the service sector favors a higher income tax base. Given the targeted public debt-to-GDP ratio, labor and capital income tax rates can be reduced more than with fiscal consolidation alone. Second, fiscal consolidation has non-negligible medium-run costs; however, they are reduced by joint implementation with the services reform. The results are robust to alternative assumptions that capture the impact of financial crisis on the financing conditions of households.

Structural Reforms, Investment and Zero Lower Bound in a Monetary Union

We assess the effects of competition�?friendly reforms on the zero lower bound (ZLB) on the monetary policy rate in a monetary union, using a dynamic general equilibrium model calibrated to two regions within the euro area (EA) and the rest of the world. Reforms simultaneously implemented in the entire EA favor an earlier exit from the ZLB if they generate sufficient short�?run inflationary effects. This happens if capital accumulation increases, magnifying the expansionary effects of reforms on permanent income and, thus, short�?run aggregate demand. If investment does not increase, the effects are not sufficient to reduce the ZLB duration.

Sovereign risk, monetary policy and fiscal multipliers: a structural model-based assessment

This paper briefly reviews the literature on fiscal multipliers and then presents results for the Italian economy obtained by simulating a dynamic general equilibrium model that allows for the possibility (a) that the zero lower bound may be binding and (b) that the initial public debt-to-GDP ratio may affect the financing conditions of the public and private sectors (sovereign risk channel). The results are the following. First, the public consumption multiplier is in general less than 1. Second, it goes above 1 only under extremely strong assumptions, namely the constancy of the monetary policy rate for an exceptionally long period (at least five years) and there is full time-coincidence between the fiscal and the monetary stimuli. Third, when the sovereign risk channel is active the government spending multiplier is much lower. Finally, in all cases tax multipliers are lower than government consumption multipliers.

Secular Stagnation, R&D, Public Investment and Monetary Policy: A Global-Model Perspective

We evaluate the global macroeconomic effects of fiscal and monetary policy measures to counterbalance secular stagnation by simulating a five-region New Keynesian model of the world economy, calibrated to the United States (US), the euro area (EA), Japan (JP), China (CH), and the rest of the world (RW). The model includes investment in research and development (RD in the short-term, it stimulates US economic activity but reduces foreign activity. Third, in the US an accommodative monetary stance, which provokes the crowding-in effect, amplifies the short-term macroeconomic effectiveness of public investment, without inducing additional negative spillovers. Fourth, EA, JP, and CH, by simultaneously increasing public investment and adopting an accommodative monetary policy, counterbalance US short-run negative spillovers and further enhance long-term world growth.

Public Investment and Monetary Policy Stance in the Euro Area

This paper evaluates the macroeconomic impact of a programme for public infrastructure spending in the euro area (EA) under alternative assumptions about funding sources and the monetary policy stance. The quantitative assessment is made by simulating a dynamic general equilibrium model of a monetary union with region-specific fiscal policy. The main results are the following. First, EA-wide stimuli are more effective than unilateral (region-specific) stimuli. Second, under EA-wide stimulus, the fiscal multiplier is close to 2 if the forward guidance (FG) on the short-term policy rate holds. Third, if the monetary authority keeps down both the policy rates (with FG) and the long-term interest rates (with quantitative easing), the fiscal multiplier exceeds 3 at peak and investment spending is self-financing. Fourth, the financing method is relevant: debt financing, particularly under an accommodative monetary policy stance and if the sovereign spreads do not increase, is more growth-friendly than tax financing in the short-term (but not in the long-term). Fifth, the effectiveness of the fiscal stimulus is larger if government spending is directed towards productive goods and its implementation occurs efficiently and without delays.

Macroeconomic effects of non-standard monetary policy measures in the euro area: the role of corporate bond purchases

This paper evaluates the macroeconomic effects of the corporate sector purchase programme (CSPP) implemented in the euro area by the Eurosystem. For this purpose we calibrate and simulate a monetary-union dynamic general equilibrium model. We assume that entrepreneurs can finance their spending by issuing bonds in the domestic corporate bond market and by borrowing from domestic banks. We found that the March 2016 CSPP boosts euro-area GDP by around 0.3% in the second year (peak level). Inflation rises too but by a smaller amount. Second, taking into account the programme’s extension in December 2016, its overall impact on GDP amounts to 0.6%. Third, the CSPP also stimulates banking activity, because the improvement in macroeconomic conditions leads to higher demand for loans from households and entrepreneurs. Fourth, an early exit from the CSPP negatively impacts its macroeconomic effectiveness, while forward guidance on monetary policy rate enhances it.

Medium-term forecasting of euro-area macroeconomic variables with DSGE and BVARX models

The paper assesses the performance of medium-term forecasts of euro-area GDP and inflation obtained with a DSGE model and a BVARX model currently in use at the Bank of Italy. The performance is compared with that of simple univariate models and with the Eurosystem projections; the same real time assumptions underlying the latter are used to condition the DSGE and the BVARX forecasts. We find that the performance of both forecasts is similar to that of Eurosystem forecasts and overall more accurate than that of simple autoregressive models. The DSGE model shows a relatively better performance in forecasting inflation, while the BVARX model fares better in forecasting

Inflation, financial conditions and non-standard monetary policy in a monetary union. A model-based evaluation

This paper evaluates the macroeconomic effects of purchases of long-term sovereign bonds by a central bank in a monetary union when (1) the private sector faces tight financial conditions and (2) the zero lower bound (ZLB) on the policy rate holds. To this end, we calibrate a dynamic general equilibrium model to the euro area (EA). We assume that households in one member country have a large initial debt position and are subject to a borrowing constraint. We simulate the effects of a negative EA-wide demand shock that induces a decline in inflation. The main results are as follows. First, the reduction in inflation amplifies the domestic and cross-country spillovers of the negative demand shock because of the country-specific borrowing constraint and the ZLB. Second, sovereign bond purchases boost economic activity and, hence, indirectly allow households to reduce their debt and relax the borrowing constraint. Third, the new, lower value of debt allows households to smooth consumption, fostering macroeconomic resilience not only in the member country concerned but also in the rest of the monetary union.