Essays on international macroeconomics

This dissertation is composed by three chapters presenting different topics in international macroeconomics. The first chapter focuses on the role of private information in the dynamics of sovereign debt yields. I propose a model of sovereign debt and default where information is incomplete: Investors receive private noisy signals about the current state of the economy, resulting in heterogeneous information sets across the investors and the government. I show that having a large enough signal noise is a sufficient condition for uniqueness of equilibrium. The main empirical contribution of this chapter is proposing and implementing a structural estimation strategy for the private information noise. Using forecasts data about real GDP growth in the euro area, available since 1999, I measure private information noise at a quarterly frequency, by insuring that the informational structure of my model implies statistics of forecast dispersion and uncertainty consistent with those observed in the data. Private information noise in the euro area shows two interesting characteristics: It peaks during crises and it has remained persistently larger than before since the Great Recession. I calibrate my model to be consistent with observed moments of the euro area economy, and I show it is successful in accounting key untargeted statistics of sovereign spreads. By means of counterfactual exercises, I assess the impact that a change in private information noise has on the spreads' statistics. First of all, I investigate what are the implications of the private information noise having remained at the lower levels prevalent before the Great Recession. I find that spreads would have been on average lower and less volatile. Then, I simulate my model for various levels of private information noise, and this exercise uncovers a hump-shaped relation between private information noise and the average spread level, and the spread volatility: While spread levels and volatility are initially increasing with private information noise, for large enough levels of the latter the relation becomes negative. The second chapter, written in collaboration with Joao B. Duarte and Luis Felipe S\'{a}enz, studies the divergence in aggregate labor productivity between Europe and the U.S., observed since the 1990's, from a sectoral standpoint. In particular, we are interested in explaining differences in sectoral labor productivity levels in the service sector, by large the most important industry in both European and U.S. economies. An issue in accounting for sectoral contributions to aggregate labor productivity is that the sectoral composition of the economy is endogenous with respect to sectoral productivity dynamics. To tackle this endogeneity, we employ a model of structural transformation portraying an economy with thirteen different sectors, corresponding to agriculture, manufacturing and eleven service industries. By means of our model, we measure cross-country comparable productivity levels in the U.S. and in eight European countries. Then, through a set of counterfactual exercises we identify which sectors are mainly accountable for the falling behind of European labor productivity. We find that the most serious problems are in the service sector, and, more specifically, in wholesale and retail trade, business services, and financial services. Finally, we decompose our measures of labor productivity in total factor productivity and contributions stemming from traditional and ICT capital. We uncover that the underperforming sectors in Europe experienced a significant fall in ICT capital endowment per hour worked with respect to the U.S. Also, total factor productivity accounts for a large share of labor productivity in these services, suggesting that the ultimate cause of the European falling behind has to be found in limitations to TFP growth. The last chapter, written in collaboration with Luis Felipe S\'{a}enz, is about the Ricardo Effect, namely the substitution of capital for labor in the production process at the expense of workers' income, when cheaper capital becomes available. We employ a unique plant-level longitudinal dataset for Colombian manufacturing establishments for the period 1982-1998 to document the existence and quantify the Ricardo Effect in the Colombian manufacturing industry. Moving from a theory of production based on a CES technology, we estimate that the elasticity of substitution between capital and labor is significantly larger than one. This finding proves the existence of the Ricardo Effect. We take into account the fact that Colombia went through a profound transformation in the early 1990's, by the introduction of important market-oriented reforms. Our empirical investigation points out that these reforms did not significantly alter the elasticity of substitution between capital and labor. However, they accelerated the fall in the price of capital relative to the price of labor, which has been occurring since 1986. We extrapolate the average decline in the relative price of capital between 1986 and 1998, and, given our preferred estimate of the elasticity of substitution in the production, we conclude that the Ricardo Effect can account for half of the reduction in the labor income share observed in Colombia between 1994 and 2014

THE ORIGINS OF THE SOVEREIGN DEBT OF ITALY: A COMMON POOL ISSUE?

Italy has the third largest public debt of the World in absolute terms and the eighth when it is GDP weighted. In addition, Italy presents the largest and most persistent development gap among its regional economies in the group of the advanced countries. Is there a link between these two facts? We present evidence in favor of a relationship between these two empirical facts by reconstructing the entire dynamics of national public deficit as a weighted sum of four macro regional deficits (Northeast, Northwest, Centre and South) . We show that the ultimate cause of the accumulation of public debt in Italy lies in the extraordinary fiscal imbalance of the Southern regions. We then focus on the determinants of the regional public deficits and their persistence. Thanks to the reconstruction of the regional deficit time series we are able to test empirically many of the several theoretical approaches suggested in the literature, including the geographically dispersed interest approach not yet considered for the Italian case. This approach turns out to be one of the best candidates to account for the size and persistence of Southern regional deficits. The whole evidence suggests the existence of a pork barrel mechanism coupled with a complex geo-political equilibrium that has allowed the Southern regions of Italy to generate deficits so large and persistent that they hoard the entire Italian National debt

The origins of the public debt of Italy: Geographically dispersed interests?

In this paper we reconstruct the macro regional government de\ufb01cits of Italy and \ufb01nd that the aggregate de\ufb01cit resulting from our estimates captures quite well the entire dynamics of the Italian national public de\ufb01cit. This new data set shows that the ultimate cause of the accumulation of public debt of Italy lies in the extraordinary \ufb01scal imbalance of the Southern regions. The new data allow us to test empirically a simple Common Pool model, augmented by a variable measuring the political in\ufb02uence of each macro region in the Government, to verify the existence of a geographically dispersed interests issue for the Italian case. Our measure of political in\ufb02uence turns out to signi\ufb01cantly explain the regions\u2019 de\ufb01cits also when controlling for population and income gaps. In addition, using a J-test approach, we \ufb01nd that including the predictions of the Common Pool\u2013Pork Barrel regional model into a general model of the Italian national de\ufb01cit turns out to greatly increase its explanatory power. The results call for deep institutional reforms of the \ufb01scal decentralization so far implemented in Italy

Why is Europe falling behind? Structural transformation and services' productivity differences between Europe and the U.S

We explain labour productivity differences of the service sector between Europe and the U.S. through the labour allocation taking place within the service sector. We measure labour productivity using a multisector structural transformation model that decomposes services into 11 sub-sectors comparable across Europe and the U.S. We identify wholesale and retail trade as well as business services to be the two sectors responsible for most of the lack of catch-up in labour productivity between Europe and the U.S. We also investigate which institutional characteristics are associated with the different performances of sectoral productivity across sectors. We empirically explore our country-sector panel measures of labour productivity levels, and our results suggest that differences in taxation, pro-business attitudes, ICT diffusion and rates of innovation are disproportionally correlated with the productivity of wholesale, retail and business services relative to the rest of the sectors in the economy.The ADEMU Working Paper Series is being supported by the European Commission Horizon 2020 European Union funding for Research & Innovation, grant agreement No 649396

Why is Europe falling behind? Structural transformation and services' productivity differences between Europe and the U.S.

We explain labour productivity differences of the service sector between Europe and the U.S. through the labour allocation taking place within the service sector. We measure labour productivity using a multisector structural transformation model that decomposes services into 11 sub-sectors comparable across Europe and the U.S. We identify wholesale and retail trade as well as business services to be the two sectors responsible for most of the lack of catch-up in labour productivity between Europe and the U.S. We also investigate which institutional characteristics are associated with the different performances of sectoral productivity across sectors. We empirically explore our country-sector panel measures of labour productivity levels, and our results suggest that differences in taxation, pro-business attitudes, ICT diffusion and rates of innovation are disproportionally correlated with the productivity of wholesale, retail and business services relative to the rest of the sectors in the economy.The ADEMU Working Paper Series is being supported by the European Commission Horizon 2020 European Union funding for Research & Innovation, grant agreement No 649396