Why net worth is the wrong concept for explaining consumption: evidence from Italy. (joint with R. De Bonis, J. Muellbauer and C. Rondinelli) [2023]
Most econometric policy models at central banks and elsewhere use an aggregate consumption function based on textbook theory. This assumes that the ‘representative household’ owns only an aggregate form of wealth, proxied by net worth, and never faces borrowing or liquidity constraints or transactions costs. This is inconsistent with the modern view of heterogeneous agent behaviour under uncertainty in incomplete markets. Based on data from 1980 to 2019, the conventional formulation for an aggregate consumption function for Italy is strongly rejected. The results show that the marginal propensities to consume out of household deposits and semi-liquid financial assets such as T-bills and mutual funds are greater than for less liquid assets. A significant positive effect from housing wealth is substantially offset by the negative effect of affordability measured by the house price-to-income ratio.
The general equilibrium effects of labor market institutions (joint with A. Gerali and E. Guglielminetti) [2021]
In this paper we study the allocative (in)efficiency of employment protection in relation to firing costs, in a general equilibrium model with labor market frictions. The optimal firing costs depend on the level of unemployment benefits and the degree of centralized wage bargaining, two features of the labor market that induce downward wage rigidity and trigger inefficient employment separations. When restrictions on firing employees with permanent contracts are inefficiently high, the introduction of temporary contracts improves welfare but does not fully restore efficiency. A quantitative analysis for the Italian economy shows that the firing costs before the recent labor market reforms were 30% higher than the optimal level, implying a consumption loss of almost 2% in the steady state. The introduction of fixed-term jobs in the early 2000’s closed one fourth of the gap between inefficient and efficient allocation, although it led to higher unemployment rates and turnover.
Consumption and Wealth: New Evidence from Italy. (joint with R. De Bonis, J. Muellbauer and C. Rondinelli) [2020]
This paper estimates a consumption function for Italy. In addition to permanent income, housing wealth, the interest rate on household loans and an index of credit conditions, our model introduces household net worth split into liquid and illiquid assets. The consumption dynamics are examined by using financial accounts and real national accounts in a Vector Error Correction Model (VECM), estimated from 1975 to 2017. The results show that the marginal propensity to consume out of liquid financial assets – mainly deposits and bonds – is positive and statistically significant, and greater than that for illiquid assets (mainly unquoted shares and insurance and pension assets); we also find that housing wealth has a smaller and significant impact on consumption. As expected, permanent income accounts for a large fraction of consumption, while the effect of the interest rate is negative.
Using credit variables to date business cycle and to estimate the probabilities of recession in real time (joint with V. Aprigliano) [2021]
Following the debate on the relationship between business and financial cycle rekindled in the last decade since the global financial crisis, we assess the ability of some financial indicators to track the Italian business cycle. We mostly use credit variables to detect the turning points and to estimate the probability of recession in real time. A dynamic factor model with Markov-switching regimes is used to handle a large dataset and to cope with the nonlinear evolution of the business cycle. The in-sample results strongly support the capacity of credit variables to estimate the probability of recessions and the implied coincident indicator proves their ability to fit the business cycle. Also in real time the contribution of credit is not negligible compared to that of the industrial production, currently used for the conjunctural analysis.
An estimated DSGE model with search and matching frictions in the credit market [2018]
Financial frictions have become fundamental for studying the business cycle and credit market dynamics. This work adds to the existing literature by introducing a search and matching scheme in the financial market into a cash in advance New Keynesian DSGE theoretical model. We provide an alternative explanation of the degree of incompleteness in the pass-through from policy rate to loan rates depending on credit market tightness, the search costs sustained by banks, and the relative powers of the agents in loan interest rate bargaining. The model is able to reproduce the countercyclical behaviour of the credit spread with respect to a positive technology shock. It also proposes a scenario in which a credit shock hits the economy. The model is estimated by using the Bayesian procedures.
Incomplete interest rate pass-through under credit and labor market frictions (joint with G. Ciccarone and F. Giuli) [2014]
By introducing search and matching frictions in both the labor and the credit markets into a cash in advance New Keynesian DSGE model, we provide a novel explanation of the incomplete pass-through from policy rates to loan rates. We show that this phenomenon is ineradicable if banks possess some power in the bargaining over the loan rate of interest, if the cost of posting job vacancies is positive and if firms and banks sustain costs when searching for lines of credit and when posting credit vacancies, respectively. We also show that the presence of credit market frictions moderates the reactions of employment and wages to a monetary shock. Finally, we confirm the finding that pass-through incompleteness has limited short-term impacts on the transmission of monetary policy shocks to output and inflation.