Zeno Rotondi

The reputation of a newborn central bank

Most of the problems that the European Central Bank has encountered are due to the slow progress made in improving the quality of the monetary union. The increasing variance of the inflationary process among the 12 countries, especially at the extremes of income level distribution – between Germany and Portugal, say – has meant that the common monetary policy is not yet the best possible. The quest for an optimum currency area continues.

Lessons from the ECB Experience: Frankfurt Still Matters!

This paper compares the European Central Bank’s conduct of monetary policy (1999-2005) with that of the Bundesbank (after the German Unification: 1990-1998) in order to test the hypothesis of an ECB with “Bundesbank’s preferences” put forward in the theoretical literature (Alesina and Grilli 1993, Fatum 2006). Econometric tests and simulations based on monetary policy reaction functions show that the continuation of the former Bundesbank regime is supported by the data. Given this empirical evidence we discuss the lessons for future Monetary Unions stemming from the ECB experience.

Inertia in Taylor Rules

The inertia found in econometric estimates of interest rate rules is a continuing puzzle. Many reasons for it have been offered, though unsatisfactorily, and the issue remains open. In the empirical literature on interest rate rules, inertia in setting interest rates is typically modeled by specifying a Taylor rule with the lagged policy rate on the right hand side. We argue that inertia in the policy rule may simply reflect the inertia in the economy itself, since optimal rules typically inherit the inertia present in the model of the economy. Our hypothesis receives some support from US data. Hence we agree with Rudebusch (2002) that monetary inertia is, at least partly, an illusion, but for different reasons.

Bank Lending Technologies and SME Credit Rationing in Europe in the 2009 Crisis

The first wave of the global financial crisis hit Europe in the last part of 2008 and through 2009. With banks in a tailspin, credit rationing intensified – as measured in various different ways – particularly for the small and medium sized enterprises (SMEs). The extent of such retrenchment in the supply of credit could reflect not only the worsened general condition of the European banks but also vary at the micro level depending on the lending technologies being used in the SME-main bank rapport. Using the EFIGE database, we examine SME credit rationing in seven EU countries (Austria, France, Germany, Hungary, Italy, Spain and the UK) and try to assess the extent to which differences in the lending technologies and in the status of the firm-main bank relationship contributed to the phenomenon. We find that a firm matching with a bank using the transactional lending technology was more likely to end up rationed for credit during the first part of the financial crisis.

Do Firm-Bank Relationships Affect Firms’ Internationalization?

We test whether the length of a firm–bank relationship affects firms’ foreign direct investment (FDI) and/or exports and if this nexus depends on the main bank itself being internationalized. The analysis is carried out on matched micro-data from a large survey of Italian manufacturing enterprises from 1998 to 2003. Our main result is that a longer relationship with the main bank fosters firms’ FDI but does not affect exports. Moreover, when the main bank has subsidiaries abroad this result is strengthened for FDI and there is even a weak positive effect of the duration of the firm–bank relationship on exports.

What’s Special About Banking in Italy? Lending Technologies, Complementarity, and Impact of Soft Information

This paper investigates the firm-main bank relationship in a sample of Italy’s SMEs. The findings suggest that banks lend to SMEs via different lending technologies. These results support the hardening-of-soft-information view, whereby also transactional lenders might somehow use difficult to codify qualitative information – traditionally believed a prerogative of relational banks – on borrowing enterprises. However, the soft information lowers (raises) the probability of rationing if the firm’s main bank uses relationship (transactional) lending technologies. Thus, the way the soft information becomes embodied in the lending decision might still differ between relational vs. transactional banks.

The Macroeconomy and the Yield Curve: A Review of the Literature with Some New Evidence

This work focuses on the recent literature, started by the seminal article of Ang - Piazzesi (2003), aimed at developing macrofinance models that combine finance specifications of the term structure of interest rates with standard macroeconomic aggregate relationships for output and inflation. We review the alternative models proposed in this new literature and discuss their main features. An alternative analysis based on cointegrated vector autoregressive models is developed and tested with the data available for the US.

Export and Innovation in Small and Medium Enterprises: The Role of Concentrated Bank Borrowing

This paper assesses the role of concentrated bank borrowing in explaining the extensive and intensive margins of export, while accounting for the simultaneous relationship between exporting and innovation. Concentrated bank borrowing proxies for the intensity of the bank–firm relationship and is a strategy often pursued by small and medium enterprises (SMEs) in order to overcome information asymmetries and improve access to external finance. Our results show that a tight relationship between an SME and its main bank increases both the firms probability of exporting and its export intensity. This positive effect is only marginally mediated by the SMEs increased propensity to introduce product innovation. We further discuss the financial and non†financial channels through which the intensity of the bank–firm relationship supports SMEs’ international activities.

Access to Credit for Small Innovative Businesses

Using data for a large sample of small firms collected through the 8th UniCredit Survey conducted in 2011, we investigate the extent to which banks of different size reward innovative firms, in terms of both access to lending and volume of credit granted. We find that more innovative firms are associated with weak credit rationing. Using instrumental variable techniques to manage the endogenous nature of innovation, we show that a large bank more strongly supports product innovation, whereas there is no substantial difference in the extent to which small and large banks provide credit to small firms undertaking process innovations.

From the Rescue of Banks to the Single Resolution Mechanism: Institutional and Empirical Analysis

The analysis of the new system of bank resolution shows the extreme complexity of the mechanism and the variety and impact of the tools available. The BRRD organises the articulation of public tasks for banking crises in three different phases: the ordinary course of business, the early intervention, and finally the situation of banks in distress or at risk of collapse; in the last one there are the conditions for resolution. The most stricking point appeared the bail-in, that has transferred the crisis risk from taxpayers to investors and savers. In fact, the dismantling of the national protection network was not, in the meantime, balanced by the introduction of the planned European protection. In the present analysis we focus on the resolution capacity of Italian banks and examine the implications of the new bail-in tool for banks’ activity and business strategies. According to our findings lending-oriented banks feature a relatively lower bail-in contribution capacity. Moreover, resolution capacity increases with size, while income diversification is found neutral. On aggregate values, we find a contraction of resolution capacity of Italian banking system in recent years, similarly to what found for the European banking system (see Ayadi and de Groen, 2015). Overall our results suggest that the new bail-in rules may imply a reassessment of the traditional retail business model towards greater income diversification, with the risk of penalising small businesses which are still the backbone of the Italian economy. As regards policy implications, our findings support, as the main option, the strategy of aggregations for strengthening the resolution capacity of the Italian banking system.