Labour Market and Social Policy in Italy: Challenges and Changes. Bertelsmann Policy Brief #2016/02

vEight years after the outbreak of the financial crisis, Italy has still to cope with and overcome a plethora of economic and social challenges. On top of this, it faces an unfavourable demographic structure and severe disparities between its northern and southern regions. Some promising reforms have recently been enacted, specifically targeting poverty and social exclusion. However, much more remains to be done on the way towards greater economic stability and widely shared prosperity

Imperfect rationality, macroeconomic equilibrium and price rigidities

We introduce some elements of Prospect Theory into a general equilibrium model with monoolistic competition in the good market and real wage rigidities due to (right to manage or efficient) wage bargaining, or to efficiency wages. We show that, under these types of labor market frictions, an increase in workers’ loss aversion: (i) reduces the equilibrium wage and in this way increases potential output; (ii) induces workers to work and consume less and in this way decreases potential output. If the former effect is greater (smaller) than the latter one, loss aversion increases (decreases) potential output. We also show that, under all the types of labor market frictions we consider, if loss aversion reduces equilibrium output, it also enhances the plausibility of nominal price rigidities

Labour market and social policy in Italy. Challenges and changes

Eight years after the outbreak of the financial crisis, Italy has still to cope with and overcome a plethora of economic and social challenges. On top of this, it faces an unfavourable demographic structure and severe disparities between its northern and southern regions. Some promising reforms have recently been enacted, specifically targeting poverty and social exclusion. However, much more remains to be done on the way towards greater economic stability and widely shared prosperity

Is social identity belief independent?

In this paper we aim to disentangle the effects on in-group favoritism driven by beliefs from those stemming from group identity, with the final goal of testing the relative power of three potential explanations of this bias: The Beliefs Driven Explanation (BDE), the Group Identity Explanation (GIE) and the Belief-mediated Group Identity Explanation (BGE). The BDE suggests that in-group favoritism is only driven by the desire not to let others’ expectations down. The GIE claims that people have a preference, per se, for members of their group. According to the BGE, people also have a preference for members of their group, but this is mediated by their second-order beliefs. To this aim, we built an experimental design able to produce exogenous variations in both group membership and expectations, hence providing a genuine test for the rationale of in-group bias. The results of our experiment suggest that beliefs per se are not a significant explanation of in-group favoritism and hence do not provide support to the BDE. Our experimental evidence does not provide support also to the BGE. We conclude that our experiment suggests to single out the GIE as the most powerful explanation of social identity

Unions, fiscal policy and central bank transparency

In a unionised economy with supply-side fiscal policy transparency has two contrasting effects on economic performance. Uncertainty on central bank's preferences induces unions to reduce wages but also produces a fully-anticipated expansionary fiscal policy which favours the setting of higher wages. Even if the net effect depends on the preference parameters of public entities and on the effectiveness of fiscal policy on aggregate supply: (i) the positive effects of opacity in unionised economies without fiscal policy are confirmed when the central bank is populist; (ii) if it is instead sufficiently conservative, transparency reduces inflation and the output gap, but at the cost of higher macroeconomic volatility.Central bank transparency, Inflation, uncertainty

Supply-side fiscal policy, conservativeness, and Central Bank trasparency

This paper focuses on the “contingent” view of transparency. By introducing endogenous fiscal policy and labour market distortions, it studies the effects the uncertainty in central bank’s (CB) preferences on the behaviour of wage and fiscal authorities and thus on output and inflation. We consider the problem on both positive and normative perspectives. First, we investigate the effects of a given degree of uncertainty in CB’s preferences on inflation and real output. Second, in line with recent literature, by assuming the possibility that information on CB’s preferences may be an endogenous variable, we study the optimal degree of transparency from the CB’s viewpoint. Although a general analysis is presented, we focus on the case of a small-bounded variance of CB’s preference, i.e. we assume that the CB’s power of affecting information disclosure and influencing private beliefs is limited

Undesired monetary policy effects in a bubbly world

Stock market bubbles arise as a joint monetary and financial phenomenon. We assess the potential of monetary policy in mitigating the onset of bubbles by means of a Markov-switching Bayesian Vector Autoregression model estimated on US 1960-2019 data. Bubbles are detected and dated from the regime-specific interplay among asset prices, fundamental values, and monetary policy shocks. We rationalize the empirical evidence with an Overlapping Generations model, able to generate a bubbly scenario with shifts in monetary policy, and where agents form beliefs over transition dynamics. By matching the VAR impulse responses, we find that procyclicality and financial instability align with high equity premia and the presence of asset price bubbles. Monetary policy tightening, by increasing real rates, is ineffective in deflating bubble episodes

Leaning against the bubble. Can theoretical models match the empirical evidence?

By estimating a Markov-switching model, we provide new evidence on the nonlinear effects of monetary policy shocks on asset prices and on their bubble component. We show that regime-dependence is mainly driven by the states affecting the interest rate equation. We also show that, following a positive interest rate shock, an OLG model of asset price bubbles with credit frictions and sticky prices may predict an increase in the real rate, a recession/deflation and an increase in the bubble value. This result, which is new to the theoretical literature, matches both the previously existing and our empirical evidence