Roberto Tamborini

Mental Representation of Economic Crisis in Italian and Swiss Samples

The content and structure of mental representation of economic crises were studied and the flexibility of the structure in different social contexts was tested. Italian and Swiss samples (Total N = 98) were compared with respect to their judgments as to how a series of concrete examples of events representing abstract indicators were relevant symptoms of economic crisis. Mental representations were derived using a cluster procedure. Results showed that the relevance of the indicators varied as a function of national context. The growth of unemployment was judged to be by far the most important symptom of an economic crisis but the Swiss sample judged bankruptcies as more symptomatic than Italians who considered inflation, raw material prices and external accounts to be more relevant. A different clustering structure was found for the two samples: the locations of unemployment and gross domestic production indicators were the main differences in representations.

Monetary Policy with Investment-Saving Imbalances

Financial instability is the new challenge for monetary policy. Most studies indicate that financial crises follow prolonged unwinding of investment–saving imbalances (ISI). These phenomena are not contemplated by the standard theoretical framework of continuous intertemporal equilibrium. This papers aim is to take a first step into the analysis of monetary policy in the context of ISI. First, a dynamic model of a flex-price, competitive economy is presented where ISI are allowed to develop. Second, upon introducing different types of Taylor rules, some indications for the conduct of monetary policy emerge, which are at variance with the standard view.

The Two Triangles: What Did Wicksell and Keynes Know About Macroeconomics that Modern Economists Do Not (Consider)?

The current consensus in macroeconomics, as represented by the New Neoclassical Synthesis, is to work within frameworks that combine intertemporal optimization, imperfect competition and sticky prices. We contrast this “NNS triangle” with a model in the spirit of Wicksell and Keynes that sets the focus on interest-rate misalignments as problems of intertemporal coordination of consumption and production plans in imperfect capital markets. We show that, with minimal deviations from the standard perfect competition model, a model structure can be derived that looks similar to the NNS triangle, but yields substantially different conclusions with regard to the dynamics of inflation and output gaps and to the design of the appropriate rule for monetary policy.

Firms’ Bankruptcy and Turnover in a Macroeconomy

The so-called “rational expectations revolution” that has completely reshaped economic theory and general equilibrium theory in the last two decades has, incidentally, brought earlier ideas on the crucial importance of agents’ knowledge, information and beliefs to the forefront forcing modem followers of those ideas to reconsider them far more deeply, systematically and rigorously (Arrow (1986), Hahn (1977, 1981)). It soon turned out that when agents act upon beliefs and engage in out-of-equilibrium learning, heterogeneity (of beliefs) and self-referentiality (of market outcomes)1 may determine large sets of multiple equilibria, and of dynamic paths of the economy, which collapse onto the unique rational-expectations (RE) competitive general equilibrium only under a number of restrictive conditions2.

TRANSATLANTIC AUSTERITY 2010-13 A COMPARATIVE ASSESSMENT

Drawing on a large data collection, this paper offers a comprehensive assessment of fiscal austerity in twenty-nine major countries in the Transatlantic area in the aftermath of the Great Recession of 2008–09. Countries include the seventeen Euro members as of 2013, and twelve non-Euro countries, the ten other members of the European Union, United States and Canada. The paper is organized in two parts. First, an index of austerity is proposed based on the contraction of the public sector’s net contribution to the economy. Then, there follows an assessment of austerity under the two dimensions of the improvement of public finances and interest rates, and of the collateral effects on economic activity and employment. The assessment is accompanied by reasoned discussion of the theoretical motivations and underpinnings of fiscal austerity and relevant criticisms. The main conclusion is that austerity in general has so far missed its promised goals, for (1) except budget deficits, public finances have further deteriorated, (2) countries under stronger austerity have achieved neither consolidation nor faster recovery but rather lower shock absorption, worse recovery performances, and higher unemployment. Claims that austerity failures are due to country-specific factors, such as mistakes in implementation and pre-crisis structural weaknesses, are not supported by robust evidence.

Living in EMU: Prices, Interest Rates and the Adjustment of Payments in a Monetary Union

Balance-of-payments problems for the EMU member countries will not vanish by virtue of the use of a single currency. This article discusses two aspects of the adjustment of payments in a monetary union that may have major repercussions for the EMU countries, for their policy-makers and for the Unions institutional design. The first aspect concerns the role of national banking systems in the adjustment process. The second is the role of changes in general price levels, and hence in the terms of trade. The two aspects are interconnected. In addition to structural features that may hinder changes in interest rates and the terms of trade in the EMU, the presence of institutional commitments of member countries that may work perversely is considered.

If the Financial System Is Complex, How Can We Regulate It?

The great financial crisis that erupted in 2007 has shaken not only the world economy but also the so-called mainstream of economics. As a major corollary, the issue of how financial markets are or should be regulated is in the eye of the storm. In this article, we discuss a new approach to economic analysis that is gradually emerging from the current debate, that of complexity, which is gaining ground especially in finance, particularly in the field of network analysis. We discuss the relationship between economic complexity and economic policy from the perspective of the search for new regulatory tools of financial systems. Our main point is that the complexity approach to financial markets by way of network analysis may represent a major stride in our understanding of these systems but also that we should be aware that this approach poses formidable challenges to policy design.

Stock Prices and Monetary Policy: Re-Examining the Issue in a New Keynesian Model with Endogenous Investment

In this paper the authors present a New Keynesian quantitative model with endogenous investment and stock-market sector that may shed further light on two unsettled issues: whether central banks should include some financial indicator in their policy rules, and which indicator may be expected to generate better stabilization performance. For comparative purposes the authors replicate the policy framework and assessment strategy of the well-known no-inclusion model of BernankeGertler (Monetary Policy and Asset Price Volatility, 1999, and Should Central Banks Respond to Movements in Asset Prices? 2001). The performance of five policy rules is assessed. Two are traditional Taylor rules (i.e. with no financial indicators) that differ in the relative weight on the output and inflation gaps. Three are financial Taylor rules, that is, augmented with one financial indicator: the deviation from trend of stock prices, of Tobins q (the rate of change stock prices relative to capital stock) and of investment. The authors show results that are at variance with BernankeGertler. First, because among the traditional rules the best performing one is output aggressive instead of inflation aggressive. Second, because the financial rule with Tobins q outperforms the traditional inflation-aggressive one under all dimensions and cases. However, the authors cannot draw a univocal conclusion as regards the comparison between the financial rule with Tobins q and the traditional but output aggressive rule.

One "monetary giant" with many "fiscal dwarfs": The efficiency of macroeconomic stabilization policies in the European Monetary Union

My own judgement is that, on balance, a European Monetary Union (EMU) would be an economic liability. The gains from reduced transaction costs would be small and might, when looked at from the global point of view, be negative. At the same time, EMU would increase cyclical instability, raising the cyclical unemployment rate (Feldstein, 1997).

Transatlantic Austerity 2010

‘Austerity’ was the 2010 word of the year according to the Merriam-Webster Dictionary, with more that 250,000 clicks on the online edition. This papers examines fiscal austerity in the specific context of the 12 early members of the European Economic and Monetary Union and, for comparative purposes, the United Kingdom and the United States, in the aftermath of the Great Recession of 2008-09. This emprical analysis of austerity policies is organized in three parts. First, an index of austerity is proposed based on the contraction of the public sectors net contribution to the economy. Then, there follows an assessment of austerity under the two dimensions of the improvement of public finances and interest rates, and of the collateral effects on output and employment. The main conclusion is that, especially for Euro-countries, austerity has so far missed its promised goals except restriction of budget deficits. Finally, three research lines are discussed that may explain why austerity may not (did not) work.