Andrea Zaghini

Fiscal adjustments and economic performing: a comparative study

The empirical relationship among fiscal contractions, permanent improvement in public finances and short-run economic performance is examined using a sample of 14 European countries over the last three decades. The actual experience of policy-making has taught that only the adjustments that relied heavily on primary expenditure cuts and were implemented over a relatively long time span were able to achieve a long lasting reduction of public liabilities. Indeed, during these consolidations, tax increase amounted to a small fraction of the total adjustment. Furthermore, though they unfolded over a longer period with respect to the unsuccessful ones, the overall budget cut was not larger. As regards the macroeconomic impact, successful episodes tended to be associated with improved economic performance. During the adjustment period and in the following two years, the economies experienced strong consumption and investment growth, reduced unemployment, better international competitiveness and falling interest rates. This empirical evidence is here interpreted via the theory known as expectation view of fiscal policy.

Gradualism, Transparency and the Improved Operational Framework: A Look at the Overnight Volatility Transmission

This paper proposes a possible way of assessing the effect on interest rate dynamics of changes in the decision-making approach, in the communication strategy and in the operational framework of a central bank. Through a GARCH specification we show that the US and the euro area displayed a limited but significant spillover of volatility from money market to longer-term rates. We then checked the stability of this phenomenon in the most recent period of improved policy-making and found empirical evidence to show that the transmission of overnight volatility along the yield curve had entirely vanished.

The Role of the Banking System in the International Transmission of Shocks

The paper analyzes the role of the banking system in the international transmission of financial shocks. A channel of transmission is defined as a mechanism through which a financial crisis in one country induces a financial crisis in another country. Channels involving banks operate through changes in the capital adequacy ratios of a common lender and in the value of collateral of domestic borrowers, through bank runs and bank panics, and through moral hazard. Recent empirical evidence points to the significant effects of the common lender channel on the probability of a financial crisis, while mitigating the role of bank runs and remaining inconclusive about moral hazard. Thus, we introduce a series of indices of vulnerability to the common lender channel that improve existing measures by taking into account both the borrowers dependence on foreign loans and the lenders exposure to a single country. By comparing the degree of vulnerability to the common lender channel during the 1990s major crises, we find that vulnerability was higher in the Asia Pacific region in 1997 (and, especially, in the five countries most involved in the crisis) than in Latin America and East Europe. Vulnerability was significantly lower in 2000 for almost all the countries in our sample, due to both a more even distribution of liabilities on the part of developing countries and a higher degree of diversification of bank investments from the three main lending countries (United States, Japan, Germany).

The pricing of government-guaranteed bank bonds

We examine the effects of the government guarantee schemes for bank bonds adopted in the aftermath of the Lehman Brothers demise to help banks retain access to wholesale funding. We describe the evolution and the pattern of bond issuance across countries to assess the effect of the schemes. Then we propose an econometric analysis of one striking feature of this new market, namely the significant “tiering�? of the spreads paid by banks at issuance, finding that they mainly reflect the characteristics of the guarantor (credit risk, size of rescue measures, timeliness of repayments) and not those of the issuing bank or of the bond itself.

Excess money growth and inflation dynamics

The paper analyzes the short-run impact of periods of strong monetary growth on inflation dynamics for 15 industrialized economies. We find that when robust money growth is accompanied by large increases in stock and house prices and loose credit conditions, the probability of recording an inflationary outburst over a three-year horizon is significantly increased. In contrast, significant money stock expansions which are not associated with sustained credit increases and strong dynamics in other asset prices seem to be less likely to have inflationary consequences and thus, less worrying from a policy perspective.

Increasing Public Expenditure: Wagner's Law in OECD Countries

Abstract The paper proposes a panel cointegration analysis of the joint development of government expenditure and economic growth in 23 Organization Economic Cooperation and Development countries. The empirical evidence provides indication of a structural positive correlation between public spending and per-capita gross domestic product (GDP), which is consistent with the so-called Wagner’s law. A long-run elasticity larger than 1 suggests a more than proportional increase of government expenditure with respect to economic activity. In addition, according to the spirit of the law, we found that the correlation is usually higher in countries with lower per-capita GDP, suggesting that the catching-up period is characterized by a stronger development of government activities with respect to economies in a more advanced state of development.

Monetary policy predictability in the euro area: an international comparison

The paper evaluates the ability of market participants to anticipate monetary policy decisions in the euro area and in 13 other countries. First, by looking at the magnitude and the volatility of the changes in the money market rates we show that the days of policy meetings are special days for financial markets. Second, we find that the predictability of the ECBs monetary policy is fully comparable (and sometimes slightly better) to that of the FED and the Bank of England. Finally, an econometric analysis of the ability of market participants to incorporate in the current money rates the expected changes in the key policy rate shows that in the euro area policy decisions are anticipated well in advance.

Sectoral Money Demand and the Great Disinflation in the US

Estimates of the welfare costs of inflation based on Baileys (1956) methodology are typically computed on the basis of aggregate money demand models. Yet, the behavior of money demand is likely to vary across sectors. As a result, the impact on welfare of changes in the inflation regime may differ between households and firms. We specifically investigate the sectoral welfare implications of the shift from the Great Inflation to the present regime of low and stable inflation. In order to do so, we estimate different functional specifications of sectoral money demand models for US households and non-financial firms using flow of funds data covering four decades. We find that the benefits were significant for both households and firms.

Shoe-Leather Costs in the Euro Area and the Foreign Demand for Euro Banknotes

We estimate the shoe-leather costs of inflation in the euro area using monetary data adjusted for holdings of euro banknotes abroad. While we find evidence of marginally negative shoe-leather costs for very low levels of the nominal interest rate, our estimates suggest that the shoe-leather costs are non-negligible even for relatively moderate levels of anticipated inflation. We conclude that, despite the increased circulation of euro banknotes abroad, in the euro area the inflation tax is still predominantly borne by domestic agents, with transfers of resources from abroad remaining small.

Financial Innovation, Macroeconomic Volatility and the Great Moderation

In the paper we propose an assessment of the role of financial innovation in shaping US macroeconomic dynamics. We extend an existing model by Christiano, Eichenbaum and Evans which studied the transmission of monetary policy impulses to business and corporate sector financing variables just before the Great Moderation period. By investigating the properties of the model over a longer time span we show that in the later period a change in the monetary policy transmission mechanism is likely to have occurred. In particular, we argue that the role of financial innovation has significantly altered the transmission of shocks