Roberto Golinelli

Bridge models to forecast the euro area GDP

Abstract Quantitative information on the current state of the economy is crucial to economic policy-making and to early understanding of the economic situation, but the quarterly national account (NA) data for GDP in the euro area are released with a substantial delay. The aim of the paper is to examine the forecast ability of bridge models (BM) for GDP growth in the euro area. BM ‘bridge the gap’ between the information content of timely updated indicators and the delayed (but more complete) NA. In this paper, BM are estimated for aggregate GDP and components both area-wide and for the three main countries of the euro area. Their short-term (one- and two-quarter ahead) forecasting performance is assessed with respect to benchmark univariate/multivariate statistical models, and a small structural model. The paper shows that national BM fare better than benchmark models. In addition, euro area GDP and its components are more precisely predicted by aggregating national forecasts.

Monetary Policy Transmission, Interest Rate Rules and Inflation Targeting in Three Transition Countries

In 1991, the rate of inflation in the Czech Republic, Hungary and Poland was between 35% and 70%. At the end of 2001, it is below 8%. We setup a small structural macro model of these economies to explain the process of disinflation. Contrary to a widespread skepticism, which permeated a large part of previous research on these issues, we show that a simple open macroeconomic model, along the lines of Svensson (2000, Journal of International Economics), with forward-looking inflation and exchange rate expectations, can adequately characterize the relationship between the output gap, inflation, the real interest rate and the exchange rate during the course of transition. We use the estimated models to interpret the main features of monetary policy in each country and identify the channels of policy transmission. We characterize the policy rules and assess the relative importance of the interest rate channel (on aggregate demand) and the exchange rate channel (which affects both aggregate demand and supply) in determining the path of (dis)inflation. In the same context, we also tentatively analyze the consequences of attempting a faster path of disinflation. Finally, we evaluate the appropriateness of the inflation targeting framework which has been adopted recently in all three countries, and discuss to what extent it represents a discontinuity with the past.

Modelling the demand for M3 in the Euro area

Modelling monetary transmission is central to understanding the role of monetary policy in the Euro area, and money demand is commonly seen as a link in that transmission mechanism. Since the beginning of the 1990s, many studies have suggested that the demand for Euro area broad money is stable over the long run because the estimation of an area-wide demand for money function provides an appropriate solution to a number of potential causes of misspecification of the single-country relations (such as spillover effects and currency substitution), and enjoys the positive consequences of a statistical averaging effect. On the other side, it must be stressed that previous benefits can be achieved at the risk of introducing parameter heterogeneity into the area-wide relationship. In order to shed some light on the issue, this study is first devoted to an analysis of the main econometric features of the money M3 demand at Euro area and single country levels, then it compares the two sets of results in a common framework that, differently from all previous studies, explicitly takes account of the potential nonstationarity of the variables of interest in both estimation and testing phases. The comparison shows that the area-wide money demand is more smooth and less subject to shocks than the single-country ones. Finally, a number of poolability tests run over subgroups highlight that low precision associated with the estimates of the parameters of the national models makes it impossible to exclude that their long-run specifications do in fact coincide.

The Cyclical Response of Fiscal Policies in the Euro Area – Why Do Results of Empirical Research Differ so Strongly?

Whether discretionary fiscal policies in industrialized countries act counter- or pro-cyclically and whether their reaction is symmetric or asymmetric over the cycle are still largely unsettled questions. This uncertainty remains even when attention is restricted to euro-area countries, where these questions have important implications for the debate on European fiscal rules. We review the recent empirical literature to explain why the results of the various studies differ so greatly. We find that differences are driven partly by the choices made in modelling fiscal behaviour and in the related notions of fiscal policy cyclicality. Results are also affected by data source and vintage (ex post or real-time). The time period chosen is relatively less important. We conclude that the notion of pro-cyclical fiscal policies often upheld in the debate is not justified by the data. Ex post data suggest either a-cyclicality or weak counter-cyclicality. Real-time information gives clearer indications of counter-cyclical behaviour, especially when we progress from a very simple i?½corei?½ model to a more complex one, including at least the impact of fiscal rules. As for symmetry or asymmetry, the answer varies with sources of data and time periods. With the more complex model the indications of asymmetric behaviour are more robust. Whenever asymmetry is present, it entails shifts in all the parameters of the fiscal rule and not necessarily in the output gap parameter.

Painless Disinflation? Monetary Policy Rules in Hungary, 1991-99

We estimate a small structural model for inflation, the output gap, the domestic interest rate and the exchange rate for Hungary during the period of the transition (1991-1999). The transmission of monetary policy impulses to macro variables is characterized in a similar fashion to that of advanced open industrial countries. In particular, in the context of our rational expectations, forward-looking model, the interest rate channel on aggregate demand and the exchange-rate channel work together as parts of the same disinflation policy. We draw several conclusions on understanding and modeling the effects of monetary policy, and also on the desirable design of policy rules during the process of disinflation. Keywords: disinflation policy, interest rate rules, transition economies, small open-economy macro models, estimation and simulation of rational expectations models

Family Firms and Investments

Family firms are a widespread control structure in most countries, especially among smaller firms. A vast literature addresses the question of whether they are performing better or worse than comparable non family firms, with not entirely conclusive results. Here we take a different, indirect approach and test whether investment decisions in family firms are more sensitive to uncertainty than in other firms. By using a novel dataset that includess both a better definition of family firms than commonly used (through self evaluation) and a very good proxy of the uncertainty on future demand that firms face, we are able to verify that – as compared to other firms – family firms are significantly more sensitive to uncertainty: this might contribute to explain why in some situations they perform better, whereas in others they do worse. We find evidence that this greater sensitivity to uncertainty in family firms is basically due to the effects of risk aversion and capital irreversibility, where the latter appear to be associated to a greater opaqueness of family firms rather than to the degree of sunkness of fixed capital. Finally, we propose some evidence that the prevalence of family firms in Italy might be associated to long standing institutional factors, such as an inefficient law enforcement system and a low social capital.

Price-Wage Dynamics in a Transition Economy: The Case of Poland

In this paper we analyse the wage-price relationship of an economy in transition characterized by important structural changes. It is known (see Perron, 1989) that structural breaks in stationary time series can induce apparent unit roots. The stationarity analysis of the series employed in the present model is conducted jointly with the assumption that the breakpoint location is unknown. We follow a testing procedure recently proposed by Zivot and Andrews (1992). Cointegration analysis of wages and prices in the presence of structural breaks finds empirical evidence in favour of two cointegrating vectors involving prices and wages. Our analysis focuses on the different structural behaviour of the price-wage dynamic relationship in the short and long term; we also demonstrate the relative importance of import prices as a source of wage-price fluctuations.

Real-Time Determinants of Fiscal Policies in the Euro Area: Fiscal Rules, Cyclical Conditions and Elections

We examine the impact of four factors on the fiscal policies of the euro-area countries over the last two decades: the state of public finances, the European fiscal rules, cyclical conditions and general elections. We rely on information actually available to policy-makers at the time of budgeting in constructing our explanatory variables. Our estimates indicate that policies have reacted to the state of public finances in a stabilizing manner. The European rules have significantly affected the behaviour of countries with excessive deficits. Apart from these cases, the rules appear to have reaffirmed existing preferences. We find a relatively large symmetrical counter-cyclical reaction of fiscal policy and strong evidence of a political budget cycle. The electoral manipulation of fiscal policy, however, occurs only if the macroeconomic context is favourable.

The Role of Indicator Selection in Nowcasting Euro Area GDP in Pseudo Real Time

Building on the literature on regularization and dimension reduction methods, we have developed a quarterly forecasting model for euro area GDP. This method consists in bridging quarterly national accounts data using factors extracted from a large panel of monthly and quarterly series including business surveys and financial indicators. The pseudo real-time nature of the information set is accounted for as the pattern of publication lags is considered. Forecast evaluation exercises show that predictions obtained through various dimension reduction methods outperform both the benchmark AR and the diffusion index model without pre-selected indicators. Moreover, forecast combination significantly reduces forecast error.

Le famiglie italiane e l'introduzione dell'euro: storia di uno shock annunciato

The aim of the paper is to analyse the evolution of households confidence during the last two years, by suggesting some interpretations about the relationships between the consumer confidence (sentiment) index (CCI) and a number of relevant macroeconomic indicators. Since the beginning of 2002, Italian households have been more and more pessimist, as recorded by the falling CCI levels (down till the levels of the 1992-93 recession). Through econometric models, where CCI depends on a number of macroeconomic variables, we show that the CCI equation seems to be characterised by a structural break since the first quarter of 2002 (it continuously overestimated actual levels). In an attempt to explain these dynamics, we relate the CCI to households perceived inflation, an additional indicator not included in the version of the model with a break. This inclusion considerably improves the explanatory power of the Italian model, and sweeps out any evidence of the previous break. The peculiarity of the Italian case is stressed by the comparison with the French and German cases (where nothing of that sort happened), and reinforces the idea that the changeover from the lira to the euro may be interpreted as a shock for Italian households.