Massimiliano Marzo

Gold and the U.S. Dollar: Tales from the Turmoil

We investigate how the relation between gold prices and the U.S. Dollar has been affected by the recent turmoil in financial markets. We use spot prices of gold and spot bilateral exchange rates against the Euro and the British Pound to study the pattern of volatility spillovers. We estimate the bivariate structural GARCH models proposed by Spargoli e Zagaglia (2008) to gauge the causal relations between volatility changes in the two assets. We also apply the tests for change of co-dependence of Cappiello, Gerard and Manganelli (2005). We document the ability of gold to generate stable comovements with the Dollar exchange rate that have survived the recent phases of market disruption. Our findings also show that exogenous increases in market uncertainty have tended to produce reactions of gold prices that are more stable than those of the U.S. Dollar.

Measuring market liquidity: An introductory survey

Asset liquidity in modern financial markets is a key but elusive concept. A market is often said to be liquid when the prevailing structure of transactions provides a prompt and secure link between the demand and supply of assets, thus delivering low costs of transaction. Providing a rigorous and empirically relevant definition of market liquidity has, however, provided to be a difficult task. This paper provides a critical review of the frameworks currently available for modelling and estimating the market liquidity of assets. We consider definitions that stress the role of the bid-ask spread and the estimation of its components that arise from alternative sources of market friction. In this case, intra-daily measures of liquidity appear relevant for capturing the core features of a market, and for their ability to describe the arrival of new information to market participants.

Determinacy of interest rate rules with bond transaction services in a cashless economy

Canzoneri and Diba (2004) show that the Taylor principle is not a panacea for equilibrium determinacy in a model where bonds and money provide liquidity services to households. We consider a cashless New Keynesian model with two types of government bonds. One bond provides transaction services, whereas the other is used only as a store of value. We show that the Taylor principle is still sacrosanct, and that the results of Leeper (1991) are confirmed.

A welfare perspective on the fiscal–monetary policy mix: The role of alternative fiscal instruments☆

The need of fiscal consolidation is likely to dominate the policy agenda in the next decade; starting from statistical evidence on the conduct of fiscal policy in the EMU area over the last decade, this paper addresses the optimality of alternative fiscal consolidation strategies. We explore the welfare properties. In this paper we explore the welfare properties of debt-targeting fiscal policy implemented through, alternatively, distortionary taxation on consumption, labour and capital income or productive and wasteful government expenditure. We build a general equilibrium model with various distortions in order to evaluate the welfare ranking of alternative fiscal policy configurations under different monetary policy regimes. Our results show the welfare superiority of fiscal adjustments based on productive government expenditure, whereas the use of a capital income tax rate as fiscal instruments yields the highest welfare loss.

A Continuous-Time Model of the Term Structure of Interest Rates with Fiscal-Monetary Policy Interactions

We study the term structure implications of the fiscal theory of price level determination. We introduce the intertemporal budget constraint of the government in a general equilibrium model in continuous time. Fiscal policy is set according to a simple rule whereby taxes react proportionally to real debt. We show how to solve for the prices of real and nominal zero coupon bonds.

Structural distortions in the Euro interbank market: The role of ‘key players’ during the recent market turmoil

We study the frictions in the patterns of trades in the Euro money market. We characterize the structure of lending relations during the period of recent financial turmoil. We use network-topology method on data from overnight transactions in the Electronic Market for Interbank Deposits (e-Mid) to investigate on two main issues. First, we characterize the division of roles between borrowers and lenders in long-run relations by providing evidence on network formation at a yearly frequency. Second, we identify the ‘key players’ in the marketplace and study their behaviour. Key players are ‘locally-central banks’ within a network that lend (or borrow) large volumes to (from) several counterparties, while borrowing (or lending) small volumes from (to) a small number of institutions. Our results are twofold. We show that the aggregate trading patterns in e-Mid are characterized by largely asymmetric relations. This implies a clear division of roles between lenders and borrowers. Second, the key players do not exploit their position of network leaders by imposing opportunistic pricing policies. We find that only a fraction of the networks composed by big players are characterized by interest rates that are statistically different from the average market rate throughout the turmoil period.

Optimal Monetary Policy with Price and Wage Rigidities

In this paper, I search for an optimal configuration of parameters for variants of the Taylor rule by using an accurate second-order welfare-based method within a fully microfounded dynamic stochastic model, with price and wage rigidities, without capital accumulation. A version of the model with distortionary taxation is also explicitly tested. The model is solved up to second-order solution. Optimal rules are obtained by maximizing a conditional welfare measure, differently from what has been done in the current literature. Optimal monetary policy functions turn out to be characterized by inflation targeting parameter lower than in empirical studies. In general, the optimal values for monetary policy parameters depend on the degree of nominal rigidities and on the role of fiscal policy. When nominal rigidities are higher, optimal monetary policy becomes more aggressive to inflation. With a tighter fiscal policy, optimal monetary policy turns out to be less aggressive to inflation. Impulse-response functions based on second-order model solution show a non-affine pattern when the economy is hit by shocks of different magnitude.

A DSGE Model with Endogenous Term Structure

In this paper, we propose a DSGE model with the term structure of interest rates drawing on the framework introduced by Andres et al. (2004) and Marzo et al. (2008). In particular, we reproduce segmentation in financial markets by introducing bonds of different maturities and bond adjustment costs non-zero at the steady state, introducing a structural liquidity frictions among bonds with different maturities: agents are assumed to pay a cost whenever they trade bonds. As a result, the model is able to generate a non-zero demand for bonds of different maturities, which become imperfect substitutes, due to differential liquidity conditions. The main properties of the model are analysed through both simulation and estimation exercises. The importance of the results are twofold. On one hand, the calibrated model is able to replicate the stylized facts regarding the yield curve and the term premium in the US over the period 1987:3-2011:3, without compromising its ability to match macro dynamics. On the other hand, the estimation, besides providing an empirical support to the theoretical setting, highlights the potentialities of the model to analyze the term premium in a microfounded macro framework. The results match very closely the behavior of actual yields, reflecting the recent activity of the Fed on longer maturities bonds.

A Note on the (Un)Pleasant Arithmetic of Fiscal Policy: The Case of Italian Public Debt

Using the simple arithmetic of government budget constraint, we perform an illustrative analysis on the Italian case, investigating the consequences on the main public finance aggregates of the adoption of a fiscal policy rule responding to past real debt/GDP ratio. Such a rule, firmly grounded in the economic analysis, would allow the reduction of Italys outstanding stock of debt without requiring the strict adherence to the 3 per cent criterion for deficit/GDP ratio, as prescribed by SGP (Stability and Growth Pact). We perform a forecasting exercise under five alternative scenarios and analyse the details of a structural debt reduction strategy with alternative yearly step.

Content Delivery and Vertical Integration in On-line Content Markets

On-line content delivery and vertical alliances between conduit and content providers are nowadays crucial issues in on-line content markets. In this paper, we discuss and compare two types of model for on-line content delivery: push and pull. We assume non-zero marginal cost for network transits, justified by the presence of network services for content delivery (like data caching). Under both models, we show that the rationale behind vertical strategic integration between conduit and content providers in the case of successive monopolies.