Trade and Business-Cycle Comovement: Evidence from the EU

This paper is an empirical study of the determinants of business-cycle comovement. Using a panel of European countries (1972-2004) it is found that bilateral trade intensity is a robust determinant of real comovement in Europe, this confirming the seminal study by Frankel and Rose (1998). It is also found that convergence in macroeconomic policies (especially fiscal policies) is associated to high degree of intra-european business-cycle correlation. Moreover, having controlled for policy convergence, the effect of bilateral trade on business cycle comovement weakens on average by a factor of 36%-33% with respect to that estimated according to Frankel and Rose’s econometric specification, this suggesting the potential endogeneity of the set of instrumental variables adopted by the two authors (Gruben, Koo and Millis, 2002).

Essays on Nonlinear Macroeconomic Dynamics

This dissertation consists of four essays that study topics in macroeconomics, finance and their interplay using nonlinear quantitative equilibrium models and state of the art econometric techniques. Chapter 1 proposes a general equilibrium model with financial intermediation and sovereign default risk to study the macroeconomic consequences of news regarding a future sovereign default. The model, estimated on Italian data, is used to measure the output losses of the 2010-2012 sovereign debt crisis, and to evaluate the effects of credit policies implemented by European authorities. Chapter 2 proposes a new class of time series model that can be used to measure nonlinearities in the data and to evaluate the fit of Dynamic Stochastic General Equilibrium (DSGE) models solved with high order perturbation. We first characterize this class, the Quadratic Autoregressive (QAR) model. We then show how the QAR model can be used as a diagnostic tool to assess whether a DSGE model is able to replicate the nonlinear behavior of a set of U.S. aggregate time series. Chapter 3 studies the determinants of medium term movements in the market value of U.S. corporations. We find that secular movements in the mean and volatility of TFP growth are strongly associated with these medium term fluctuations in asset prices. These empirical findings are then interpreted within a production based asset pricing model where the mean and volatility of aggregate productivity growth varies over time. We show that the model can rationalize a sizable elasticity of asset prices to the drivers of aggregate productivity. Chapter 4 proposes a method to identify Harrod-neutral technology shocks in the data in presence of input heterogeneity in the aggregate production function. We prove that, in a wide class of models, Harrod-neutral technology shocks are the only one consistent with a certain form of balanced growth. We then use this property to identify Harrod-neutral shocks using a state-space model. Monte Carlo simulations show that the proposed method performs very well in small samples

Trade and business cycle co-movement: evidence from the EU

This paper studies empirically the determinants of business cycle co-movement using a panel of European countries (1972-2004). We find that both policy convergence (in particular fiscal policy) and bilateral trade intensity are robust determinants of real co-movement in Europe, this confirming the seminal study by Frankel and Rose (1998), and more recent finding by Bergman (2004) and Darvas, Rose and Svapary (2005). Moreover ,once controlling for policy convergence, the effect of bilateral trade on business cycle co-movement weakens by a factor of 36%-33%. This finding is interpreted as being evidence in favour of the recent claim by Gruben, Koo and Millis (2002) that Frankel and Rose econometric procedure suffers from omitted variables bias and endogeneity in the set of instruments

Optimal Time-Consistent Government Debt Maturity

Abstract: This paper develops a model of optimal debt maturity in which the government cannot issue statecontingent debt. As the literature has established, if the government can perfectly commit to fiscal policy, it fully insulates the economy against government spending shocks by purchasing short-term assets and issuing long-term debt. These positions are quantitatively very large relative to GDP and do not need to be actively managed by the government. Our main result is that these conclusions are not robust when lack of commitment is introduced. Under lack of commitment, large and tilted debt positions are very expensive to finance ex-ante since they ex-post exacerbate the government's problem stemming from a lack of commitment. In contrast, a flat maturity structure minimizes the cost entailed by a lack of commitment, though this structure also limits the ability to insure against shocks and increases the volatility of fiscal policy distortions. We show that the optimal time-consistent maturity structure is nearly flat because reducing average borrowing costs is quantitatively more important for welfare than reducing fiscal policy volatility. Thus, under lack of commitment, the government actively manages its debt positions and can approximate optimal policy by confining its debt instruments to consols

Rational Expectations Models with Higher Order Beliefs,” mimeo

Abstract This paper develops a general method of solving rational expectations models with higher order beliefs. Higher order beliefs are crucial in an environment with dispersed information and strategic complementarity, and the equilibrium policy depends on infinite higher order beliefs. It is generally believed that solving this type of equilibrium policy requires an infinite number of state variable

Rational Expectations Models with Higher Order Beliefs,” mimeo

Abstract This paper develops a general method of solving rational expectations models with higher order beliefs. Higher order beliefs are crucial in an environment with dispersed information and strategic complementarity, and the equilibrium policy depends on infinite higher order beliefs. It is generally believed that solving this type of equilibrium policy requires an infinite number of state variable

Misure critiche. Nuova Serie. A. 18, n. 1-2 (2019)

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