Giancarlo Gandolfo

The Italian Continuous Time Model: Theory and Empirical Results

In this paper we give a detailed exposition of the fifth version of our model of the Italian economy, which is specified as a set of 24 nonlinear stochastic differential equations. We first examine its qualitative properties (steady state solution, structural stability, etc.). We then present the results of the estimation in continuous time, with particular emphasis on adjustment speeds and sensitivity analysis. Finally, we examine the in-sample and out-of-sample predictive performance of the model.

Chaos and the Exchange Rate

Chaotic exchange rate models are structural models built in discrete time (difference equations), and show that with orthodox assumptions (PPP, interest parity, etc) and introducing plausible nonlinearities in the dynamic equations, it is possible to obtain a model capable of giving rise to chaotic motion. However, none of these models is estimated, and the conclusions are based on simulations: the empirical validity of these models is not tested. In this paper, a continuous time (the exchange rate is obviously a continuous variable) exchange rate model is built as a non-linear set of three differential equations and its theoretical properties (steady state, stability, etc,) analysed. The model is then econometrically estimated in continuous time with Italian data and examined for the possible presence of chaotic motion. This paper also shows that the continuous time estimation of economic models built as systems of nonlinear differential equations is a very powerful tool in the hands of the profession.

Capital liberalization and exchange rate expectations: the Italian case

In previous publications (Gandolfo and Padoan, 1990b, c) we examined the problem of modelling capital liberalization as a dynamic phenomenon (i.e. as the transition from a situation with capital controls to a situation with perfect capital mobility). Starting from the portfolio approach to capital movements, we showed that the presence of capital controls is reflected in the adjustment speed of the actual to the desired stock of net foreign assets. The latter does, in turn, depend on fundamentals.

Perfect Capital Mobility and the Italian Economy

The problem of modelling capital liberalisation has not yet been satisfactorily solved in the theoretical literature, nor do suitable empirical studies exist for the industrialised world.

Does the Feldstein-Horioka Puzzle Exist? Theoretical Analysis and Empirical Evidence

The aim of this work is to employ theoretical and empirical analysis on the role of specialinterest groups in the determination of the EU trade policy. We build a two-stage game model of trade policy formation in a multisector-multicountry framework. We obtain the level of protection as a function of industry characteristics, in addition to political and economic factors at member state and European levels. The model is then tested by 2SLS estimation using data for 15 countries and 41 sectors. The econometric output suggests empirical support to model’s predictions as it highlights an important role for both national and European groups in trade policy making.