Luisa Corrado

Where is the Economics in Spatial Econometrics

Spatial econometrics has been criticized by some economists because some model specifications have been driven by data-analytic considerations rather than having a firm foundation in economic theory. In particular this applies to the so-called W matrix, which is integral to the structure of endogenous and exogenous spatial lags, and to spatial error processes, and which are almost the sine qua non of spatial econometrics. Moreover it has been suggested that the significance of a spatially lagged dependent variable involving W may be misleading, since it may be simply picking up the effects of omitted spatially dependent variables, incorrectly suggesting the existence of a spillover mechanism. In this paper we review the theoretical and empirical rationale for network dependence and spatial externalities as embodied in spatially lagged variables, arguing that failing to acknowledge their presence at least leads to biased inference, can be a cause of inconsistent estimation, and leads to an incorrect understanding of true causal processes.

No Man is an Island: the Inter-personal Determinants of Regional Well-Being in Europe

There is a strong need to complement the analysis of social well-being at the European regional level to supplement existing, predominantly economic analysis. This work extends the measurement of well-being across the EU-15 regions in several ways. First, we assess the determinants of well-being using a multilevel modelling approach using data at the national, regional and individual levels. Second, we have extended the model to account for group effects, as well as intrinsic socio-demographic indicators and higher-level exogenous contextual factors. Empirical findings support the idea that well-being is strongly dependent both on group effects and on more specific individual characteristics. We find that there is some evidence of greater regional effects relative to national effect.

Reserves, Liquidity and Money: An Assessment of Balance Sheet Policies

The financial crisis and its aftermath has stimulated a vigorous debate on the use of macro-prudential instruments for both regulating the banking system and for providing additional tools for monetary policy makers. The widespread adoption of non-conventional monetary policies has provided some evidence on the efficacy of liquidity and asset purchases for offsetting the lower zero bound. Central banks have thus been reminded as to the effectiveness of extended open market operations as a supplementary tool of monetary policy. These tools are essentially fiscal instruments, as they issue central bank liabilities backed by fiscal transfers. And so having written these tools into the fiscal budget constraint, we can examine the consequences of these operations within the context of a micro-founded macroeconomic model of banking and money. We can mimic the responses of the Federal Reserve balance sheet to the crisis. Specifically, we examine the role of reserves for bond and capital swaps in stabilising the economy and also the impact of changing the composition of the central bank balance sheet. We find that such policies can significantly enhance the ability of the central bank to stabilise the economy. This is because balance sheet operations supply (remove) liquidity to a financial market that is otherwise short (long) of liquidity and hence allows other .nancial spreads to move less violently over the cycle to compensate.

Long-Term Growth and Short-Term Volatility: The Labour Market Nexus

We study the relationship between growth and variability in a DSGE model with nominal rigidities and growth driven by learning-by-doing. We show that this relationship may be positive or negative depending on the impulse source of fluctuations A key role is also played by the Frisch elasticity of labour supply and by institutional features of the labour market. Our general findings are that monetary shocks volatility will generally have a negative effect on growth, while the opposite tends to be true for fiscal and productivity shocks. These findings are somehow consistent with the existing empirical evidence: data show, in fact, a somewhat ambiguous relationship between output growth and real variability, but a generally negative relationship between output growth and nominal variability.

Sociability, Altruism and Subjective Well-Being

We provide non experimental evidence of the relevance of sociability on subjective wellbeing by investigating the determinants of life satisfaction on a large sample of Europeans aged above 50. We document that voluntary work, religious attendance, helping friends/neighbours and participation to community-related organizations affect positively and significantly life satisfaction. We illustrate the different impact that some sociability variables have on eudaimonic versus cognitive measures of subjective wellbeing. Our empirical findings discriminate among other regarding and self-regarding preferences as rationales explaining such behaviour. We document that different combinations between actions and motivations have different impact on life satisfaction thereby providing support for the relevance of these specific “contingent goods” and to the literature of procedural utility. Our findings are confirmed in robustness checks including refinements of the dependent variable, instrumental variables and sensitivity analysis on departures from the exogeneity assumption.

Reconnecting Money to Inflation: The Role of the External Finance Premium

We re-connect money to inflation using Goodfriend and McCallum’s (2007) model where banks supply loans to cash-in-advance constrained consumers on the basis of the value of collateral provided and the monitoring skills of banks. We show that when shocks to monitoring and collateral dominate those to goods productivity and the velocity of money demand, money and the external finance premium become closely linked. This is because increases in asset prices allow banks to raise the supply of loans leading to an expansion in aggregate demand, via a compression of financial interest rates spreads, which in turn tends to be inflationary. Thus money and financial spreads are negatively correlated when banking sector shocks dominate. We suggest a simple augmented stabilising monetary policy rule that exploits the joint information from money and the external finance premium.

Identification Strategies in Survey Response Using Vignettes

In this paper we explore solutions to a particular type of heterogeneity in survey data which is manifest in the presence of individual-specific response scales. We consider this problem in the context of existing evidence on cross-country differences in subjective life satisfaction, and in particular the extent of cross-country comparability. In this instance observed responses are not directly comparable, and inference is compromised. We utilise two broad identification strategies to account for scale heterogeneity. Keeping the data fixed, we consider a number of estimators based on alternative generalisations of the ordered response model. We also examine a number of alternative approaches based on the use of additional information in the form of responses on one or more additional questions with the same response categories as the self-assessment question. These additional questions, referred to as anchoring vignettes, can under certain conditions, be used to correct for the resultant biases in model parameters.

Identifying And Interpreting Convergence Clusters Across Europe

In this paper we examine the spatial and temporal distribution of per capita income across Europe. We base our analysis on a cluster methodology which allows for an endogenous selection of regional clusters using a multivariate test for stationarity where the number and composition of clusters are determined by the application of pairwise tests of regional contrasts. To circumvent the problem of how to interpret the composition of resulting convergence clusters we construct a number of testable hypotheses based upon orderings consistent with the findings of recent studies on regional growth and convergence. We do this using a set of geographical, socio-demographic and political indicators measuring contiguity and institutional similarity, accessibility, specialisation, region specific levels of agglomeration and regional classification according to the European Union Structural Fund objectives. One of the contributions of our study is a method which facilitates the interpretation of the cluster outcomes on the basis of the factors identified above. Unlike previous studies, we present our results using a geographic representation of regions across Europe.

Exchange Rate Monitoring Bands: Theory and Policy

Recent empirical research by Mark Taylor and co-authors has found evidence of hybrid dynamics for real exchange rates. While there is a random walk near equilibrium, for real exchange rates some distance from equilibrium there is mean-reversion which increases with the degree of misalignment. An interesting question is whether this non-linear mean-reversion might be policy-induced. John Williamson (1998), for example, has proposed a ‘monitoring band’ in which there is no intervention near equilibrium but there is substantial intervention triggered by exchange rate deviations outside a preset band. In this Paper we develop a theoretical model of such a monitoring band to see whether it can generate patterns of non-linear mean-reversion akin to those reported in empirical research.

Money, Prices and Liquidity Effects: Separating Demand from Supply

In the canonical monetary policy model, money is endogenous to the optimal path for interest rates and output. But when liquidity provision by banks dominates the demand for transactions money from the real economy, money is likely to contain information for future output and inflation because of its impact on financial spreads. And so we decompose broad money into primitive demand and supply shocks. We find that supply shocks have dominated the time series in both the UK and the US in the short to medium term. We further consider to what extent the supply of broad money is related to policy or to liquidity effects from financial intermediation.