Research
ARTICLES IN JOURNALS
Bargaining power and the Phillips curve: a micro-macro analysis,
(joint with M.J. Lombardi and E. Viviano)
Journal of the European Economic Association, (2023), forthcoming.
We use a general equilibrium model to show that a decrease in workers' bargaining power amplifies the contribution to the output gap of adjustments along the extensive versus intensive margin of labour utilization. Under standard assumptions on the disutility of labour, this mechanism reduces the cyclical movements of inflation relative to those of the output gap. Micro-level evidence, based on a survey of Italian firms, provides support to the relationship between bargaining power and a stronger adjustment along the extensive margin (compared to the intensive one), as well as to attenuated price response when firms adjust labour input mainly through the extensive margin. A full Bayesian estimation of the model using Italian aggregate data for the samples 1970-1990 and 1991-2014 confirms that the decline in workers' bargaining power has weakened the inflation-output gap relationship through a change in the relative adjustment of the labour margins.
Labor force participation, wage rigidities and inflation,
(joint with F. Nucci)
Journal of Macroeconomics, (2018), Volume 55, Pages 274-292.
The fall in US labor force participation during the Great Recession stands in sharp contrast with its parallel increase in the euro area. In addition to structural forces, cyclical factors are shown to account for this phenomenon, with the participation rate being procyclical in the US from the inception of the crisis and countercyclical in the euro area. We rationalize these diverging dynamics by using a general equilibrium business cycle model, which nests the endogenous participation decisions in to a search and matching model. We show that the "added worker" effect might outweigh the "discouragement effect" if real wage rigidities are allowed for and/or habit in consumer preferences is sufficiently strong. We then draw the implications of variable labor force participation rates for inflation and establish the following result: if endogenous movements in labor market participation are envisaged, then the degree of real wage rigidities becomes almost irrelevant for price dynamics. Indeed, during recessions, the upward pressures on inflation stemming from the lack of a downward adjustment in real wage s are offset by an opposite influence from the additional looseness in the labor market, due to the higher participation rate associated with wage rigidities.
Capital destruction, jobless recoveries, and the discipline device role of unemployment,
Macroeconomic Dynamics, (2019) Volume 23, Issue 2, Pages 590-624.
featured in European Commision, European Economic Forecast, Winter 2014
I consider an economy growing along the balanced growth path, that is hit by an adverse shock to its capital accumulation process. The model integrates efficiency wages due to imperfect monitoring of the quality of labour in a search and matching framework with methods of dynamic general equilibrium analysis. I show that, depending on the firms' abilities to assess workers' performance, the discipline device role of unemployment may account for sharp declines in employment and jobless recoveries driven by exceptional increases in the work effort of employees. The model also explains why rigid real wages may prevail in equilibrium: the large movements in unemployment are indeed associated with real wage rigidity, which is generated endogenously by efficiency wages.
The time varying effect of oil price shocks on euro area exports,
(joint with F. Venditti)
Journal of Economic Dynamics and Control, (2015) Volume 59, Pages 75-94.
In this paper we provide novel evidence on changes in the relationship between the real price of oil and real exports in the euro area. By combining robust predictions on the sign of the impulse responses obtained from a theoretical model with restrictions on the slope of the oil demand and oil supply curves, we identify oil supply and foreign productivity shocks in a time varying VAR with stochastic volatility. We find that from the 1980s onwards the relationship between oil prices and euro area exports has become less negative conditional on oil supply shortfalls and more positive conditional on foreign productivity shocks. Using the theoretical model we show that our empirical findings can be accounted for by (i) stronger trade relationship between the euro area and emerging economies (ii) a decrease in the share of oil in production and (iii) increased competitive pressures in the product market.
Failing to forecast low inflation and Phillips curve instability: a euro area perspective,
(joint with F. Venditti)
International Finance, (2015), Volume 18, Issue 1, Pages 47-68.
featured in Panel remarks by Vitor Constancio, at the Jackson Hole Economic Symposium, Federal Reserve Bank of Kansas City, 29 August 2015
featured in Introductory speech by Mario Draghi, ECB forum on Central Banking, Sintra 22 May 2015
featured in Intervention by Peter Praet, Executive Board of the ECB, during a panel on "The elusive pursuit of inflation", IMF Spring Meetings Seminar, Washington, 16 April 2015.
Professional forecasters failed to anticipate the sharp fall in inflation in the euro area in 2013-2014. We investigate whether this forecasts failure can be partly attributed to a break in the sensitivity of inflation to the output gap. Using structural break tests and time varying parameter models we find that the responsiveness of inflation to the output gap has increased substantially in the past two years. We offer two (observationally equivalent) interpretations of the results. The first is that an increase in the cyclicality of inflation could result either from lower nominal rigidities or weaker strategic complementarities in price setting. A second possibility is that current output gap estimates are understating the amount of spare capacity in the economy. We estimate that to reconcile the observed fall in inflation with the historical correlation between consumer prices and the business cycle, the output gap should be wider by around one third.
(previous version: Bank of Italy Occasional Papers, 237, 2014)
On the slope and the persistence of the Italian Phillips curve
(joint with Sergio Santoro)
International Journal of Central Banking, (2015), Volume 11, Issue 2, Pages 157-197.
featured in Panel remarks by Vitor Constancio, at the Jackson Hole Economic Symposium, Federal Reserve Bank of Kansas City, 29 August 2015
We investigate the determinants of inertia in Italian inflation estimating a Phillips curve derived from a general equilibrium business cycle model that allows for intrinsic and extrinsic sources of inflation persistence, along with trend inflation, and that encompasses both nominal and real rigidities as key factors of the output-inflation trade-off. We perform the estimation over two different sub-samples, 1981Q1-1998Q4 and 1999Q1-2012Q3, to take into account the structural break represented by the starting of the Economic and Monetary Union. We find that in the period between 1999Q1-2012Q3 the dependence of Italian inflation on its own past has diminished and the slope of the Phillips curve has dropped relative to the years before 1999. The latter is a consequence of increased strategic complementarity in price setting, due in turn to higher sensitivity of demand elasticity to firms' relative prices, on the top of lower trend inflation and an increase in the average duration of prices.
Performance Pay and Changes in U.S. Labor Market Dynamics
(joint with Francesco Nucci)
Journal of Economic Dynamics and Control, (2013), Volume 37, Issue 12, Pages 2796-2813.
A shift in the design of labor compensation occurred at around the mid-1980s in the U.S. and deals with an increased role of performance pay in driving the cyclical movements of wages. Using a DSGE model we show that this structural change, taken in isolation by modifying one single parameter, seems to account at least qualitatively for many observed changes in the U.S. labor market dynamics. In particular, it contributes to generate the disappearance of the procyclical response of labor productivity to non-technology shocks and the reduction of the contractionary effects of technology shocks on hours. Moreover, it is conducive to a drop in the volatility of output, a parallel increase in the volatility of wages and to changes in unconditional correlations consistent with what documented in the U.S. economy between the pre- and post-1984 period.
(previous version: Bank of Italy Working Paper 800, 2011)
Why are the 2000s so different from the 1970s? A structural interpretation of changes in the macroeconomic effects of oil prices, (joint with Olivier Blanchard)
Journal of the European Economic Association, (2013), Volume 11, Issue 5, Pages 1032-1052.
featured in The Economist, 7th December 2009.
In the 1970s, large increases in the price of oil were associated with sharp decreases in output and large increases in inflation. In the 2000s, even larger increases in the price of oil were associated with much milder movements in output and inflation. Using a structural VAR approach, Blanchard and Gali (2009) argued that this reflected a change in the causal relation from the price of oil to output and inflation. They then argued that this change could be due to a combination of three factors, namely, a smaller share of oil in production and consumption, lower real wage rigidity, and better monetary policy. Their argument, based on simulations of a simple New-Keynesian model, was informal. Our purpose in this paper is to take the next step, and to estimate the explanatory power and contribution of each of these factors. To do so, we use a minimum distance estimator that minimizes, over the set of structural parameters and for each of two samples (pre- and post-1984), the distance between the empirical SVAR-based impulse response functions and those implied by a New-Keynesian model. Our empirical results point to an important role for all three factors.
(previous version: NBER Working Paper WP15467)
Nominal and Real Wage Rigidities in New Keynesian Models: a Critical Survey,
Journal of Economic Surveys (2009), Volume 24 Issue 3, November 2009, Pages 539– 572.
The labor market is receiving increasing attention in the New Keynesian literature. In this paper I critically survey this literature in order to highlight the role played by wage rigidities in the explanation of fluctuations caused by technology shocks. To this aim, I present a dynamic stochastic general equilibrium (DSGE) model with sticky prices, nominal wage rigidities, and hiring costs. The comparison between this model and Blanchard and Gali (2009) highlights the non trivial differences which exist in the way nominal wage and real wage rigidities drive the economy’s dynamics. My conclusion is that models incorporating nominal wage rigidities and some degree of price stickiness provide a better account of macroeconomic dynamics than models with real wage rigidities.
Nominal vs Real Wage Rigidities in New Keynesian Models with Hiring Costs: a Bayesian Evaluation, (joint with Massimiliano Tancioni)
Journal of Economic Dynamics and Control (2010), Volume 34, Issue 7, Pages 1305-1324
The introduction of labor market frictions into the New Keynesian DSGE model solves some of the main drawbacks of the baseline framework. In this paper we show that this extended model, by assuming real wage rigidities, fails to replicate the correct wage dynamics and the observed negative conditional correlation between supply shocks and employment, known as "productivity-employment puzzle". We then show that these empirical limitations can be overcome by replacing real wage rigidities with nominal wage rigidities, without discarding other appealing features of the model. By adopting a Bayesian perspective, we estimate the dynamic properties of the model with real wage rigidities and confront them with those of the model with nominal wage rigidities, concluding that there is decisive evidence in favor of the latter.
WORKING PAPERS
(joint with F. Corsello)
Bank of Italy Temi di discussione, 1429, 2023
Energy price shocks broaden inflation inequality, measured by the gap between consumer prices for households at the bottom and top of the expenditure distribution, which isdue to different consumption baskets. We provide a VAR-based quantification of the impact of energy shocks on inflation inequality. We then develop and estimate a general equilibrium two-agent model with imported energy to rationalize the empirical results and show why this effect becomes stronger when monetary policy responds aggressively to inflation. Indeed, though less affluent consumers too benefit from the containment of inflation resulting from monetary policy action, they do so to a lesser extent than more affluent ones, given the relatively lower share of consumption spent on items whose prices are sensitive to cyclical conditions. Our results call for the need to complement the monetary policy response with targeted fiscal measures.
Price rigidities, input costs, and inflation expectations: understanding firms' pricing decisions from micro data, DOWNLOAD
(joint with A. Tagliabracci)
Bank of Italy Questioni di Economia e Finanza, 733, 2022
Using a rich survey panel dataset of Italian businesses, thispaper provides new empirical evidence on the drivers of firm s’ pricing decisions over the last six years. We document a set of interesting results. First, the share of firm s adjusting their prices in each period co-moves with current inflation. Moreover, firms’ choice s are consistent with a hybrid framework that lies between time- and state-dependent models of pricesetting. Second, firms’ pricing decisions respond to past pricing choices, changes in input cost s and beliefs about future developments of their own prices, rather than on expectations for aggregate inflation. Third, firms’ price changes are also connected to their observable characteristics: size class, sector of activity and exposure to foreign markets. Fourth, the heterogeneity in price changes depends strongly on the dispersion of beliefs concerningfuture price variations, while input prices only explain a limited part. Our results shed light on the presence of different channels for the formation of firms’ prices, pointing toward the need to consider the channels togeth er so as to understand firms’ pricing decisions and inflation developments.
On the anchoring of inflation expectations in the euro area, DOWNLOAD
(joint with S. Neri, G. Bulligan, S. Cecchetti, F. Corsello, A. Papetti, C. Rondinelli, A. Tagliabracci)
Bank of Italy Questioni di Economia e Finanza, 712, 2022
This paper assesses the anchoring of long-term inflation expectations in the euro area, a key issue from a monetary policy perspective, using a range of measures of inflation expectations and methods. The overall reading of the evidence is that long-term inflation expectations in the euro area have rapidly re turned to levels close to the new 2 per cent symmetric inflation target of the ECB announced in July 2021, in a context of elevated inflationary pressures linked to the recent surg e in energy prices and persistent supply-side bottlenecks. Nonetheless, the risk of an upward de-anchoring of long-term inflation expectations deserves close and continuous monitoring. This risk has to be taken into account when assessing the appropriate pace of normaliz ation of the ECB’s monetary policy stance, acknowledging that the inflation outlook is surrounded by high uncertainty, as signalled by all types of expectations.
Firms' inflation expectations and pricing strategies during Covid-19, DOWNLOAD
(joint with M. Bottone, C. Conflitti, A. Tagliabracci)
Bank of Italy Questioni di Economia e Finanza, 619, 2021
We use the Bank of Italy's Survey on Inflation and Growth Expectations to explore how the COVID-19 shock affects firms’ pricing policies and their inflation expectations. We find that the longer the time deemed necessary to return to their normal business levels and the greater the attention they pay to their competitors’ pricing policies, the more likely firms are to reduce their own product prices. Moreover, firms' inflation expectations react to the expected persistence of the macroeconomic effects of the shock. We rationalize this evidence through the lens of a general equilibrium model.
Bargaining power and the Phillips curve: a micro-macro analysis, DOWNLOAD
(joint with M. J. Lombardi and E. Viviano)
Bank of Italy Temi di discussione, 1302, 2020
Revise & resubmit Journal of the European Economic Association
We use a general equilibrium model to show that a decrease in workers’ bargaining power amplifies the relative contribution to the output gap of adjustments along the extensive margin of labour utilization. This mechanism reduces the cyclical movements of marginal cost (and inflation) relative to those of the output gap. We show that the relationship between bargaining power and adjustments along the extensive margin (relative to the intensive margin) is supported by microdata. Our analysis relies on panel data from the Italian survey of industrial firms. The Bayesian estimation of the model using euro-area aggregate data covering the 1970-1990 and 1991-2016 samples confirms that the decline in workers’ bargaining power has weakened the inflation-output gap relationship.
Inflation expectations in the euro area: indicators, analyses and models used at Banca d'Italia DOWNLOAD
(joint with S. Cecchetti, D. Fantino, A. Notarpietro, A. Tagliabracci, A. Tiseno and R. Zizza)
Bank of Italy Questioni di Economia e Finanza, 612, 2021
This paper illustrates the tools used at Banca d’Italia (Bd’I) to monitor the evolution of inflation expectations. The paper also surveys the analyses conducted at Bd’I to assess how inflation expectations affect agents’ choices and the economy. The first part discusses the measures of inflation expectations derived from the prices of inflation-linked financial instruments and from surveys of professional forecasters. The second part focuses on the measures of households’ and firms’ inflation expectations collected by Bd’I, along with analyses presenting empirical evidence that expectations do indeed drive agents’ economic choices. The last part analyses the overall effect of exogenous changes in inflation expectations on the real economy through the lens of the macroeconomic models used at Bd’I.
Labour productivity and the wageless recovery, DOWNLOAD
(joint with A. M. Conti and E. Guglielminetti)
Bank of Italy Temi di discussione, 1257, 2019
We show that the weak relationship between wage growth and unemployment experienced by the euro area since the global financial crisis has reflected a change in the response of labour productivity (output per worker) to an increase in employment, from nil up to 2009 (acyclical) to negative since then (countercyclical). We argue that the strong persistence of the latest recessions and of the subsequent recovery could account for this change. We rationalize the importance of the duration of the cyclical phase for macroeconomic correlations by using a theoretical model where firms use both the extensive and intensive margin of labour and face employment adjustment costs. When demand shocks are persistent, firms make a relatively bigger adjustment to the extensive margin, leading to a countercyclical response of labour productivity, which attenuates the reaction of wages. We take the theoretical model to the data using a Bayesian VAR where persistent demand shocks are identified by exploiting the theoretical prediction, which associates them with a countercyclical profile of labour productivity. We show that persistent demand shocks (i) produce a lower reaction of wages to employment and (ii) have been a non-negligible driver of employment and wage dynamics in the aftermath of the global financial crisis.
I will survive. Pricing strategies of financially distressed firms, DOWNLOAD
(joint with I. Duca, J. Montero, R. Zizza)
Bank of Italy Temi di discussione, 1106, 2017 and European Central Bank Working Paper, 2164, 2018,
Revise & Resubmit Journal of Money Credit and Banking
We consider a standard result of customer market theory: if firms have stable customer relations and face financial frictions, they may keep prices relatively high in times of low demand and vice versa. Indeed, during recessions, when firms have low cash flow and greater difficulty in raising external funds, they may set higher prices on their locked-in shoppers to maintain short-term profits at the expense of future market shares. We extend this theoretical framework so that the countercyclical behaviour of price margins is strengthened by the expected persistence of the downturn and the procyclicality of competitive pressures. We test these predictions for Italian firms participating in the 2014 Wage Dynamics Network Survey. All things being equal, financially constrained firms charge higher markups when faced with low demand; this behaviour is more evident when demand is perceived as being persistent. Our findings suggest that the severity of financial constraints in Italy was one of the causes of the sustained growth of prices in 2010-2013, notwithstanding the considerable slack in the economy.
Surprise! Euro area inflation has fallen, DOWNLOAD
(joint with F. Venditti)
Bank of Italy Occasional Papers 237, 2014
Between 2013 and 2014, following the recession triggered by the sovereign debt crisis, euro area inflation decreased sharply. Although a fall in the inflation rate was to be expected, given the severity of the recession, professional forecasters failed to anticipate it. A possible explanation for this forecast failure lies in a break in the cyclicality of inflation, which was unaccounted for in forecasting models. We probe this explanation in the context of a simple backward-looking Phillips curve and find that the sensitivity of inflation to the output gap has recently increased. We rationalize this result through a structural model, in which a steepening of the Phillips curve arises either from lower nominal rigidities (a decrease in the average duration of prices) or from fewer strategic complementarities in price-setting due to a reduction in the number of firms in the economy.
The Great Moderation and the Rise in Wage Inequality and Individual Uncertainty.
WP Report for the VI European Research Framework Programme 2008-2009: “Inequality: mechanism, effects and policies.”
ARTICLES IN BOOKS
L’evoluzione della distribuzione del reddito e la crisi attuale, in in F.R. Pizzuti (a cura di), La Crisi e lo Stato Sociale, BULGARINI, Firenze, 2009 (joint with Francesco Vona).
La Strategia Europea per l’Occupazione, in F.R. Pizzuti (a cura di), Rapporto sullo stato sociale- 2007, UTET, Torino, 2007.
Il sistema degli ammortizzatori sociali, in F.R. Pizzuti (a cura di), Rapporto sullo stato sociale- 2007, UTET, Torino, 2007 (joint with Elena Pisano).