Andrea Fracasso

The German Model and the European Crisis

The large current account imbalances in the eurozone reflect persistent diverging trends between core and periphery countries, also fed by low interest rates and abundant capital flows brought about by the introduction of the euro. With the global financial crisis, the market sentiment has changed, and capital has left the periphery countries suffering from debt and growth problems due to their failure to bring price–wage dynamics into uniformity with those of the more disciplined countries. Germany is called upon to provide financial assistance and additional external demand; however, though the euro is at stake, Germans are recalcitrant. This article investigates the rationale of the German stance in light of the (corporatist‐etatist, neo‐mercantilist) German socio‐economic model and the widespread concern about losing the competitiveness that Germany regained through painful reforms and changes in the last two decades.

Global Rebalancing and the Future of the Sino-US Codependency

The crisis of 2008 has shown the unsustainability of the global imbalances centered on the US-China symbiotic relationship that characterized the previous decade. This has revived the so-called growth-rebalancing debate. In particular, the new emerging consensus calls for a re-orientation of the US economy away from consumption and toward exports, and for policy shifts that can help China to reduce its dependence on external demand and inefficiently high rates of capital accumulation. We discuss the economic and political feasibility of the proposed patterns of re-adjustment by focusing on the short-term and long-term trade-offs faced by the policy-makers. We argue that the rebalancing will be gradual and partial because of the costs associated with a radical shift in the growth models adopted by both countries. We believe that this scenario will be consistent with a world economy expanding at lower rates than over the past decade. Copyright (c) 2010 The Authors Journal compilation (c) 2010 Institute of World Economics and Politics, Chinese Academy of Social Sciences.

International R&D spillovers, absorptive capacity and relative backwardness: a panel smooth transition regression model

We investigate how a countrys absorptive capacity and relative backwardness affect the impact of international R&D spillovers on domestic Total Factor Productivity (TFP). To account for nonlinearities, we adopt a Panel Smooth Transition Regression approach, where a countrys TFP elasticity to the foreign R&D stock is allowed to change smoothly across various identified extreme values, and the change is related to observable transition variables: human capital (capturing the countrys absorptive capacity) and relative backwardness. The results suggest that absorptive capacity is positively associated with international R&D spillovers. In contrast with previous results, relative backwardness is instead found to have a negative and significant impact on international knowledge spillovers.

Seeking mutual understanding: a discourse-theoretical analysis of the WTO Dispute Settlement System

The Dispute Settlement System (DSS) of the World Trade Organisation (WTO) is a mechanism to settle international trade controversies by means of adversarial procedures. In this paper we aim to address the following question: why is the DSS adversarial in kind and articulated through such sophisticated procedures? We shall combine studies in the fields of politics, law and economics through philosophical analysis to look for a systemic answer to this question in the inherent qualities of the procedures through which the DSS is articulated. Specifically, we shall resort to Jurgen Habermas’s discourse theory, as a hermeneutic device to disentangle the different kinds of “action orientations” DS procedures may have (compromise, consensus and understanding). We shall identify the reasons of the specific characterisation given to the DSS in the purposeful connections between its procedural features, the general aims pursued by the WTO and the disputes emerging within it. (This abstract was borrowed from another version of this item.)

Estimating dynamic localization economies: the inadvertent success of the specialization index and the location quotient

ABSTRACT Estimating dynamic localization economies: the inadvertent success of the specialization index and the location quotient. Regional Studies. After addressing definitional issues on the concepts of concentration and specialization, the paper reviews the justifications for and the interpretation of some indicators of localization economies used in the empirical literature on agglomeration economies: specialization indexes and location quotients. A simulation exercise shows under what conditions certain specifications lead to biased estimations of dynamic localization (Marshall–Arrow–Romer – MAR) externalities. The results suggest that applied researchers can choose between the size of the local industry, the specialization index and the location quotient to proxy for these externalities as far as they also encompass a correct proxy for the size of the local economy.

When did inflation expectations in the euro area de-anchor?

ABSTRACT Long-term inflation expectations in the Euro area (EA) remained well anchored during the global financial crisis. Less is known about the following period. By investigating whether inflation expectations have become sensitive to the arrival of economic news, this article empirically analyzes the behavior of inflation expectations in the EA during the most recent period. It finds evidence that the de-anchoring of expectations started in December 2011 and never reversed. This is in line with the more aggressive stance held by the European Central Bank (ECB) in the following months as well as with the pattern of ECB Professional Forecasters’ expectations.

MODELLING THE TRANSITION TOWARDS THE RENMINBI'S FULL CONVERTIBILITY: IMPLICATIONS FOR CHINA'S GROWTH

There is a widespread consensus that China’s growth paradigm needs a rebalancing away from investment and external demand and towards consumption and domestic demand. This rebalancing process is supposed to be accompanied by the transition towards Renminbi’s full convertibility. In contrast, it is controversial to what extent this adjustment will accelerate the slowdown of China’s growth, which will likely occur because of other structural factors. We address these issues by means of a two-country two-stage (before and after Renminbi’s full convertibility) model, which reproduces some qualitative features of China’s growth pattern and its relationship with the US. We analyze to what extent altering the Chinese exchange rate policy, as well as other structural and policy variables, may have (short-, medium- and long-term) effects on the evolution of the Chinese economy. The paper shows that by lifting the controls on the capital account and letting the currency float, the Chinese authorities will not only expose the economy to the risks of free capital mobility, but will also renounce to important policy instruments for controlling the dynamics of China’s economy and the allocation of the national resources.

Addressing the Core-Periphery Imbalances in Europe: Resource Misallocation and Expansionary Fiscal Policies

How can the euro area tackle its perennial problems of core/periphery imbalances and anaemic long-term growth? According to network members Luigi Bonatti and Andrea Fracasso, Universita di Trento, there is no quick-fix solution. Temporary fiscal stimulus does not produce permanent improvements, while the upfront costs and short-term negative impact of structural reforms can feed distributional conflicts. Permanent cross-national transfers provide local relief, but also exacerbate tensions among member states. The authors advocate a nuanced approach focused on the key role of structural differences in affecting income and growth differentials, as well as competitive imbalances across the euro area.

Solidarity and Responsibility in the Euro Area: Foes or Friends?

Abstract The recent debate on the reform of the economic governance in the euro area has been marred by a stark disagreement on the correct sequence between risk-reduction (responsibility) and risk-sharing (solidarity). In fact, the dichotomy between risk-reduction and risk-sharing may be fallacious as they reinforce each other, particularly in a monetary union with no lender of last resort for the public sector and no common macroeconomic stabilization mechanisms. The lack of risk-sharing mechanisms is per se a major source of redenomination and default risks and thus it makes the euro area prone to financial market segmentation along national borders and ultimately weaker. At the same time, greater structural convergence has to be achieved through structural reforms and fiscal prudence in order to reduce the likelihood of future negative idiosyncratic shocks in currently vulnerable countries. Notwithstanding some progress towards a politically viable solution encompassing both responsibility and solidarity, a number of important issues remain controversial. This short article summarizes the debate and introduces some of these controversial issues, ranging from the correct role of market discipline when markets are prone to self-fulfilling prophecies and multiple equilibria, to the (dis)advantages of sovereign debt restructuring mechanisms based on rules rather than discretion, from the pros and cons of new safe assets in the euro area to the primacy of coping with debt legacy problems, and the like.

Natural disasters and firm resilience in Italian industrial districts

We carry out a firm-level empirical analysis to evaluate the economic impact of the sequence of earthquakes that occurred in 2012 in the Italian region of Emilia-Romagna and to address the question of whether the localization of a firm within an industrial district mitigated or exacerbated this impact. We estimate the effect of the earthquake on firms’ performance via two alternative methods: Difference-in-differences and propensity score matching in levels and first-differences. Our findings suggest that the earthquake reduced turnover, production, value added, and return on sales of the surviving firms, at least in the short term. In addition, the debt over sales ratio grew significantly more in the firms located in the areas affected by the earthquake. The empirical evidence also suggests that the negative impact of the earthquake was slightly higher for the firms located in industrial districts, thereby suggesting that, at least in the short term, the usually positive cumulative processes associated with localization within an agglomerated area could have reversed and magnified the negative impact of a disruptive exogenous supply shock.