Claire Giordano

Does Economic Theory Matter in Shaping Banking Regulation? A Case-study of Italy (1861-1936)

Abstract We provide an assessment of the role of economic theory in orienting Italy’s banking legislation over eight decades. From the unification of the country (1861) to the introduction of the 1936 Banking Act, five regulatory regimes are mapped out. Whilst market discipline and self-regulation arguments characterized the first sub-period (1861-1892), the first biting issuing-bank regulation, which inaugurated the second regime (1893-1906), was a political compromise that ignored economists’ requests of a return to convertibility. The third sub-period (1907-1925) was punctuated by two banking crises: the first (1907) vindicated economists who had stressed the need of a LLR, but did not lead to any crisis-prevention regulation; the second (1921-23) confirmed – to no avail – the dangers congenital to bank-industry ties, pinpointed by some members of the profession. The following sub-period (1926-1930) was inaugurated by the first commercial bank regulation (1926) and responded to the economists’ call for restricting bank competition. The 1936 regulation, which marked the onset of the approximately five-decade long fifth regime, matured in a vacuum of economic debate.Financial crises were an important trigger in all the discussed regulatory episodes to which many players, amongst which economists, contributed with varying weights and roles according to the circumstances. Players’ public and private motivations towards regulation were relevant drivers. The existing political regime is not found to have been a discriminating factor in determining the influence economic theory had on bank legislation. More important was instead the degree of authority and legitimacy that economists as a professional category displayed at the time of reforming the regulation. Finally, the desirability of economic theory actually percolating into banking laws is discussed, although the historical evidence on the matter is not clear-cut.

Capital and labour (mis)allocation in the euro area: Some stylized facts and determinants

We analyse the evolution of capital and labour (mis)allocation across firms in five euro-area countries (Belgium, France, Germany, Italy and Spain) and eight main sectors of the economy during the period 2002-2012. Three key stylized facts stand out. First, in all countries except Germany, capital allocation worsened over time whereas the efficiency of labour reallocation did not change significantly. Second, the observed increase in capital misallocation has been particularly marked in services compared with industry. Third, misallocation of both labour and capital decreased in all countries in 2009 and again for some countries/sectors in 2011-2012. We then take stock of the possible drivers of input misallocation dynamics in a standard panel regression framework. Restrictive bank lending standards and heightened demand uncertainty in certain years led to growth in capital misallocation, whereas since 2002 overall deregulation in both the product and labour markets has helped dampen input misallocation dynamics. Controlling for all variables, the Great Recession per se improved the allocative efficiency of both capital and labour.

Exploring Price and Non-Price Determinants of Trade Flows in the Largest Euro-Area Countries

Since the mid-2000s price-competitiveness indicators for some euro-area countries have been providing conflicting signals. Against a stability of the producer price (PPI)-based measure, the manufacturing unit labour cost (ULCM)-deflated indicator points to a major competitiveness loss in Italy; we argue that the discrepancy mostly reflects a divergence of ULCM and PPI trends in competitor countries. Owing to the fading representativeness of labour on overall costs, price-based indicators appear to be more appropriate than those based on ULCMs to assess external competitiveness. In Italy ULC-based indicators play a less relevant role relative to price-deflated measures in explaining exports; the opposite holds true for Germany and France, whereas in Spain exports are insensitive to prices. Non-price competitiveness proves important in explaining Italian, German and, in particular, Spanish exports. Imports react to price-competitiveness dynamics only in Italy; considering the participation in global value chains is useful to correctly identify import sensitivity to domestic and foreign demand.

Main Drivers of the Recent Decline in Italy's Non-Construction Investment

This paper examines the causes of the exceptionally marked fall in non-construction investment in Italy since 2007. Non-financial private services were the main driver of the decline in the aggregate investment rate, but all sectors weighed in negatively; the reallocation of value added away from industry was a further drag on investment. In concordance with survey findings, an aggregate model of investment indicates that even during the recent double recession the most important driver of capital accumulation was demand conditions. The user cost of capital had a substantial negative impact in the acute phases of the sovereign debt crisis, but since 2013 its contribution has been positive, thanks to the ECB’s expansionary monetary policy. The constraints on capital accumulation imposed by tight credit supply conditions were particularly severe in 2009 and 2012. Finally, uncertainty provided a sizeable drag on investment growth not only during the global financial crisis but also in the last two years. The significance of these determinants of investment is confirmed also by a disaggregated model for the thirteen manufacturing branches.

Long-run trends in Italian productivity

Based on updated datasets of value added and of labour and capital inputs, this paper provides a reassessment of the proximate causes of Italy’s economic development since its political unification in 1861 to 2016. Italy’s pre-WWII economy featured weak productivity growth, with the exception of the Giolitti era and the 1920s. Italy then embarked on an exceptional catching-up process relative to the technological leaders during the Golden Age. Compared with the pre-WWII years, when the Italian economy was held back by slow productivity growth in the large agricultural sector, the catching-up process during the Golden Age was propelled by the rapid shift of labour out of agriculture. As in many countries, this rapid growth in productivity could not be sustained after 1973, but the further slowdown since the 1990s has been more pronounced in Italy than elsewhere. The disappointing performance of the Italian economy since the early 1990s is largely explained by slow labour productivity growth in the now dominant services sector and by sluggish aggregate total factor productivity. Labour productivity developments actually turned negative during the protracted crisis following the global financial turmoil, due to the decline in capital accumulation and in total factor productivity. Since the start of the recovery in 2013, while total factor productivity has returned to a moderately positive trend, the capital stock has not fully overcome the legacy of the crisis.

Is corruption efficiency-enhancing? A case study of nine Central and Eastern European countries

We investigate the role of corruption in the business environment in explaining the efficiency of within-sector production factor allocation across firms in nine Central and Eastern European (CEE) countries in 2003-2012. Using a conditional convergence model, we find evidence of a positive relationship between corruption growth and both labour and capital misallocation dynamics, once country framework conditions are controlled for: this link is larger the smaller the country, the lower the degree of political stability and civil liberties, and the weaker the quality of its regulations. As input misallocation is one of the determinants of productivity growth, we further show that the correlation between changes in corruption and TFP growth is indeed negative. Our results also hold when we tackle a possible omitted variable bias by instrumenting corruption with two instrumental variables (the percentage of women in Parliament and freedom of the press). In conclusion, targeted action against corruption in the CEE region would be efficiency-enhancing.

New indicators to assess price-competitiveness developments in the four largest euro-area countries and in their main trading partners

This paper provides a new set of monthly price-competitiveness indicators for 62 countries, which are to be adopted by the Bank of Italy as its new official indicators. We employ updated trade weights that take into account the highly relevant competitive pressures of local producers in all outlet markets while guaranteeing a vast geographical coverage in international standards. We also assess price competitiveness with respective to different sub-groups of trading partners, namely euro-area vs. non euro-area countries. Focusing on the four largest economies in the euro area, in the period 1999-2014 Germany and Frances price competitiveness is found to have improved; it was roughly stable in Italy whereas it deteriorated in Spain.

Macroeconomic estimates of Italy’s mark-ups in the long-run, 1861-2012

We explore three alternative methodologies drawn from economic history literature to compute macroeconomic total-economy estimates of Italy’s mark-ups since 1861, based on the new historical national accounts presented in Baffigi (2013) and Giordano and Zollino (2015). Two key features of Italy’s history stand out: a) the increase in market power under the Fascist regime and b) the strengthening of competition since 1993. We then focus on a more limited time span (1970-2012) in order to estimate sectorial mark-ups using the model developed in Bassanetti, Torrini and Zollino (2010). Employing Istat and EU-KLEMs data, we find evidence of a reduction in mark-ups after the completion of the Single Market, with an acceleration after the inception of the European Monetary Union, owing mostly to the decrease in workers’ bargaining power rather than in firms’ margins. Moreover, we find large heterogeneity in mark-ups across sectors, with regulated services displaying weaker competition than manufacturing and market services.