Eugenio Gaiotti

Pricing Behaviour and the Introduction of the Euro: Evidence from a Panel of Restaurants

This paper assembles an original panel of data from 2,500 restaurants in Italy over the 1998-2004 period. The main objective is to study whether the euro cash changeover had an impact on individual pricing behaviour, as it seems to be perceived by consumers. Although the sample is not representative of the whole sector, our interest stems from the possibility of gaining deeper insights from individual data, as well as from the fact that restaurant prices were at the centre of the public discussion. First, the paper analyses the distribution of price changes in several years, to identify what features may contribute to explain the widespread perception of a large effect of the introduction of the euro on prices. Second, the paper discusses the economic mechanisms that may help explaining the impact of the cash changeover on prices. The data show that restaurant prices recorded sizeable increases in both 2001 and 2002 (around 10% and 9%, respectively). The cumulated increase in the price of a meal between 1998 and 2003 is substantial (the index rises by 40%). The changeover might have focused the public attention over this medium-run trend, prompting the attribution of the whole increase to the introduction of the euro. The analysis suggests that such increases reflect in part unfavourable developments on the costs side (strong increases in unit labour costs and fresh food inputs in both years) and strong increases in demand (especially in 2001). Part of the restaurant price increase recorded in 2002, however, does seem ascribable to the effect of the changeover. We find evidence consistent with a ‘menu-cost’ hypothesis for pricing behaviour: the rise in the average meal price is mainly due to a greater fraction of agents who revise their price, rather than to greater individual price revisions. Moreover, more market power (as proxied by a local concentration index) is associated with greater than average price increases during the changeover. A simple interpretation is proposed for this finding, which may also explain why the effects of the cash changeover may have been especially pronounced in this industry as opposed to more competitive ones.

The impact of unconventional monetary policy on the Italian economy during the sovereign debt crisis

We assess the impact on the Italian economy of the main unconventional monetary policies adopted by the ECB in 2011-2012 (SMP, 3-year LTROs and OMTs) by following a two-step approach. We evaluate their effects on money market interest rates, government bond yields and credit availability and then map them onto macroeconomic implications using the Bank of Italy quarterly model of the Italian economy. We find that the SMP and the OMTs have been effective in counteracting increases in government bond yields and that the LTROs have had a beneficial impact on credit supply and money market conditions. From a macroeconomic perspective, we find that the unconventional policies have had a large positive effect on the Italian economy, mainly through the credit channel, with a cumulative impact on GDP growth of 2.7 percentage points over the period 2012-2013. To conclude, while the policies did not prevent the Italian economy from falling into recession, they did avoid a more intense credit crunch and a larger output fall than those actually observed.

Cooperation in Managing the Dollar (1985–1987): Interventions in Foreign Exchange Markets and Interest Rates

In this paper we study the experience of cooperation between the United States, Japan and Germany in managing the dollar in 1985–1987. The basic facts, with emphasis on the role played by the different policy tools (interventions in foreign exchange markets, monetary and fiscal policies) are reviewed in Section 2. In Section 3 we discuss the channels of monetary-financial interaction between countries participating in a managed exchange rate system, based on the model presented in the Appendix. In particular, we show that interest rate differentials (short and long-term) across countries and their maturity structure within countries may depend (together with many other factors) on intervention policies in foreign exchange markets (that is, on the degree to which market trends are “resisted”); and the degree of sterilization of interventions. This result could be relevant for establishing a connection between exchange rate management under the Louvre accord and the steep rise in long-term interest rates in the US that “detonated” the October 1987 stock-market crash. We then present empirical evidence on intervention policies (Section 4), monetary policies and sterilization (Section 5), interest rates (Section 6) in the period under review; the critical relationships identified by the model are examined in some detail, with various quantitative techniques, to see whether actual developments lend any support to the propositions derived from the model.

Pitfalls of Monetary Policy Under the Incomplete Information: Imprecise Indicators and Real Indeterminacy

The paper examines the link between the precision of the available monetary policy indicators and the determinacy of equilibrium in a forward-looking macroeconomic model with partial information and an optimizing central bank. When the information on endogenous variables is not precise enough, the central bank acts too timidly; there is a possibility of self-fulfilling fluctuations in inflation and output. It is argued that, unless they are very precise, projections of output or inflation over the relevant horizon cannot be the only criterion for determining monetary policy actions. Rules which include a sufficient reaction to nominal variables may be necessary to supply an anchor for prices, even when the policymaker intends to consider all relevant information. Appointing a i?½conservativei?½ central banker may also induce a less timid response to signs of inflation or deflation, even when their interpretation is difficult. In contrast, relying too much on measures of exogenous variables, such as potential output, can be counter-productive, because it could induce an attitude that is not responsive enough to inflation or deflation.