Research

Publications:

"Questioning the puzzle: fiscal policy, real exchange rate and inflation" [PDF]

Journal of International Economics, 2021, Elsevier, vol. 133(C).

Abstract: The paper re-investigates the effects of government spending shocks on the real exchange rate, inflation and the trade balance. We find that an increase in government spending appreciates the real exchange rate, increases inflation and induces a trade balance deficit. The difference with previous puzzling results lies in the identification of fiscal shocks: embedding a narrative approach in a proxy-SVAR over a sufficiently large sample is what makes the difference. Empirical results are then shown to be consistent with an estimated standard small open economy model, for a broad range of variables.

"The international transmission of US tax rate shocks" (with F.Natoli) [PDF]

IMF Economic Review (2021), 69, 325–356

Abstract: We investigate the international propagation of fiscal policy shocks originated in the United States using a Global VAR framework. We identify shocks to US tax rates and government spending by using narrative series as external instruments, following the proxy SVAR methodology. The main results of the paper are the following: (1) the domestic effects of tax shocks are stronger than those of a government spending shock (2) spillovers are in most cases positive and significant, albeit of small size; (3) the boost to exports in recipient economies, stimulated both by stronger US demand and by real exchange rate depreciation vis-à-vis the US dollar, is the main transmission channel; financial channels (through long-term interest rates and equity prices) also play a role.

"Is fiscal consolidation self-defeating? A Panel-VAR analysis for the Euro area countries" ( with M.G.Attinasi )

Journal of International Money and Finance Volume 74, June 2017, Pages 147–164

[Working Paper Series, 1883, European Central Bank]

Media Coverage: Reuters, CATO Institute, Kelta

Abstract: This paper studies the effects of fiscal consolidation on the debt-to-GDP ratio of 11 euro area countries. Using a quarterly fiscal Panel VAR allows us to trace out the dynamics of the debt-to-GDP ratio following a fiscal shock and to disentangle the main channels through which fiscal consolidation affects the debt ratio. We define a fiscal consolidation episode as self-defeating if the debt-to-GDP ratio does not decrease compared to the pre-shock level. Our main finding is that when consolidation is implemented via a cut in government primary spending, the debt ratio, after an initial increase, falls to below its pre-shock level. When instead consolidation is implemented via an increase in government revenues, the initial increase in the debt ratio is stronger and, eventually, the debt ratio reverts to its pre-shock level, resulting in what we call self-defeating austerity.

"The effect of a Chinese slowdown on inflation in the euro area and the United States" ( with F.Natoli)

Economic Modelling Volume 62, April 2017, Pages 16–22

Abstract: We investigate the effect of a Chinese slowdown on inflation in the euro area and the United States using the NiGEM multi-country model. We construct different scenarios including a fall in Chinese aggregate demand, a commodity price slump, financial market corrections and a devaluation of the renmimbi. While the commodity slump has the strongest impact on inflation, the demand and exchange rate shocks also play a role; on the contrary, financial turbulences have minor effects. Finally, we study the extent to which monetary policy in advanced economies can succeed in reflating the economy following such a Chinese slowdown. The room for central bank interventions is large.

"The importance of updating: evidence from a Brazilian now-casting model" ( with D.Bragoli and M.Modugno )

OECD Journal: Journal of Business Cycle Measurement and Analysis, Volume 2015(1), pages 5-22

Also appeared as Federal Reserve Board working paper FEDS 2014-94

Abstract: How often should we update predictions for economic activity? Gross Domestic Product is a quarterly variable disseminated usually a couple of months after the end of the quarter, but many other macroeconomic indicators are released with a higher frequency and financial markets react very strongly to them. However, most of the professional forecasters, including the IMF, the OECD and most Central Banks, tend to update their forecasts of economic activity only twice or four times a year. The great exception is the Central Bank of Brazil which collects the predictions at a daily frequency. The aim of this article is to evaluate the forecasting performance of the Central Bank Survey and to compare it with the mechanical forecasts based on state of the art now-casting techniques. Results indicate that institutional forecasts perform as well as model based forecasts. The latter finding suggests that, on the one hand, judgmental forecasters do not have computational limitations and they are able to incorporate very quickly new information in a way that is as efficient as a machine. On the other hand, it confirms what has been found in other studies, namely that a linear time invariant model does a good job and hence that eventual non linearities, time variations and soft information (such as weather conditions or government decisions) that could be incorporated by judgment, do not provide new important information.

Old papers:

"Fiscal Austerity and Reputation" [PDF]

Abstract: This paper investigates whether government reputation in .nancial markets explains the implementation of .scal austerity during a recession, as opposed to a countercyclical response. In a model with endogenous default risk we show that, if the value of the government's discount rate is private information a benevolent government has an incentive to deviate from the optimal countercyclical policy followed under full information. In this case, the government implements .scal austerity, reducing spending and increasing taxation.

Work in progress:

Fiscal space and the transmission of fiscal policy" (with K.Pallara) [PDF]

Abstract: This paper investigates the interaction between fiscal policy transmission and fiscal sustainability, captured through the concept of fiscal space. In order to measure the evolution of fiscal space over time we propose four indicators, drawing from different concepts available in the literature. We use these indicators to define periods of ample and tight fiscal space. We then estimate the effects of government spending shocks in the United States according to the level of fiscal space, for the period 1929:Q1-2015:Q4. The main result of the paper is that fiscal multiplier is above one when fiscal space is ample, while it is below one when fiscal space is tight. Moreover, such difference is always significant. This result is very robust across different identification methods and samples

Working papers:

"Monetary policy gradualism and the nonlinear effects of monetary shocks" [PDF]

Working paper "Temi di discussione, Bank of Italy"

(with F.Natoli and L.Rossi)

Abstract: Financial markets analyze statements and speeches in great detail to infer the Federal Reserve’s future policy moves. To avoid large market reactions, the Fed often changes the policy rate through a series of small adjustments rather than once-and-for-all hikes or cuts. We argue that the gradualist approach could yet provide a signal about the extent of the intended policy change. We use the time-varying perception of gradualism to study the state-dependent effects of monetary shocks in times of more and less aggressive policy using high-frequency identified shocks and local projections. Results suggest that the transmission of monetary shocks is stronger when the perception of gradualism is high, and that this also affects the size of international spillovers.