A Two-Country NATREX Model for the Euro/Dollar

This paper develops a NATREX (NATural Real EXchange rate) model for two large economies, the Eurozone and the United States, which are fully specified and allowed to interact. After description of the theoretical framework grounding on dynamic disequilibrium modelling approach in continuous time, we implement empirical analysis. First, we estimate the model in its structural form as a simultaneous nonlinear differential equation system for the 1975-2003 period. Second, we simulate the Euro/USD NATREX series in- and out-of-sample by using parameters estimates. The simulated equilibrium real exchange rate enables us to determine a benchmark against which the dynamics of the actual real exchange rate can be measured.NATREX, equilibrium exchange rate, Euro/USD, structural approach, continuous time econometrics, misalignment

Endogenous Growth in an Open Economy and the Real Exchange Rate

This paper is a step in the direction of a larger research project aimed at determining the long run equilibrium value of the euro/dollar real exchange rate. Given this value, one could then give a precise meaning to the notion of undervaluation or overvaluation of the euro, and calculate its misalignment. The problem however arises of how to assess the reliability of such misalignment calculations. In our opinion, we must have a benchmark (namely a period in which we exactly know from outside sources the misalignment itself), against which we can test the validity of the model underlying our calculations. This of course is not (yet) possible for the euro, so that all the calculations of the misalignment of the euro that have been made can only be compared with one another, without knowing which is the good one. Hence, before building a model to be applied to the euro/dollar, we tested our ideas incorporating them in a basic model to be applied to the lira/dollar in a period in which we do exactly know the actual misalignment of the lira from outside sources.NATREX, equilibrium exchange rates, international capital flows, misalignment

Temporary migration and foreign direct investment

The question of complementarity or substitutability of FDI and international labour mobility has not yet been answered. The substitutability assumption does not take into consideration the technological spillover of FDI in the host countries. Moreover, migration flows reveal cultural characteristics and labour force properties of their native country which may stimulate bilateral business networks, strengthening the complementarity assumption between capital and labour flows. In this paper we build a continuous time dynamic model where these offsetting forces are at work. We analyze whether, and to what extent, the increase of labour mobility might affect FDI outflows. A numerical simulation is performed showing that to a higher labour mobility corresponds a higher income growth rate. Some policy implications and further research direction are suggested.Temporary Migrations; Migrant Network; FDI; Dynamic Model; European Union;

The Euro/Dollar Exchange Rate: Chaotic or Non-Chaotic?

The aim of this paper is to develop a continuous time exchange rate model that allows for heterogeneity of the agents’ beliefs, in order to explore non-linearities and possible chaotic behaviour. The theoretical model contains an intrinsic non-linearity that gives rise to a jerk differential equation, which is in principle capable of generating chaos. The model is econometrically estimated in continuous time with Euro/Dollar data and examined for the possible presence of chaotic motion. Our results indicate that the possibility of chaotic dynamics has to be rejected.exchange rate, chaos, jerk equation, continuous time econometrics

A Two-Country NATREX Model for the Euro/Dollar

This paper develops a NATREX (NATural Real EXchange rate) model for two large economies, the Eurozone and the United States. The NATREX approach has already been adopted to explain the medium-long term dynamics of the real exchange rate in a number of industrial countries. So far, however, it has been applied to a one-country framework where the "rest of the world" is treated as given. In this paper, we build a NATREX model where the two economies are fully specified and allowed to interact. Our theoretical model offers the basis for empirical estimation of the euro/dollar equilibrium exchange rate that will be carried out in future research. JEL classification: F31; F36; F47Key words: NATREX; equilibrium exchange rate; euro/dollar; structural approach

Does Migration Help Reducing Inequality and Social Exclusion?

The impact of remittance flows on growth and income distribution has attracted a great deal of attention, but the theoretical and empirical literature on the relationship between remittances and economic development is far from clear. Although there is wide consensus that foreign remittances can help receiving households to increase income, consumption and capabilities to cope with socioeconomic shocks, there has been little quantitative research on impacts of remittances on household welfare and poverty. Our paper seeks to fill some of these gaps proposing an empirical analysis of the role of remittances as a tool for reducing inequality and covering households against poverty and social exclusion risks. The empirical analysis focuses on four Eastern European Countries: Slovenia, Poland, the Czech Republic and Hungary, and is based on the EU-SILC 2005 data-set providing for each household information as to the received inter-household cash transfers and amongst which regular cash support from households in other countries (i.e. remittances) are included.Remittances, inequality, poverty

Elasticity of substitution and technical progress: Is there a misspecification problem?

In Saltari et al. (2012, 2013) we estimated a dynamic model of the Italian economy. The main result of those papers is that the weakness of the Italian economy in the last two decades is due to the total factor productivity slowdown. In those models the information and communication technology (ICT) capital stock plays a key role in boosting the efficiency of the traditional capital, and hence of the whole economy. The ICT contribution is captured in a multiplicative way through a weighting factor. The other key parameter to explain the Italian productivity decline is the elasticity of substitution. Recent literature provides estimates of the elasticity of substitution well below 1 -- thus rejecting the traditional Cobb-Douglas production function -- though there is no particular value on which consensus converges. In our opinion, however, these estimates are affected by a theoretical specification problem. More generally, the technological parameters are long run in nature but the estimates are based on short-run data. Our aim is to look more deeply into the estimation procedure of the technological parameters. The standard estimation results present a common fundamental problem of serially correlated residuals so that the standard errors will be under-estimated (i.e. biased downwards). We think that at the root of this problem there are two theoretical issues: the estimated models are static in nature and do not incorporate frictions and rigidities. Our modelling strategy takes into account, though implicitly, adjustment costs without leaving out the optimization hypothesis. Although we cannot in general say that this framework gets rid of the serial correlation problem, the correlation statistics for our model do show that residuals are not serially correlated. Recent literature provides estimates well below 1 -- thus rejecting the traditional Cobb-Douglas production function -- though there is no particular value on which the consensus converges. In our opinion, however, these estimates are affected by a specification problem, which has theoretical roots. The technological parameters are long run in nature but the estimates are based on short-run data: the "real" issue is to bridge this gap. Our aim is to look more deeply into the estimation procedure of the technological parameters. The standard estimation results present a common fundamental problem of serially correlated residuals so that the standard errors will be under-estimated (i.e. biased downwards). We think that at the root of this problem there are two theoretical issues: the estimated models are static in nature and do not incorporate frictions and rigidities. Our modelling strategy takes into account, though implicitly, adjustment costs without leaving out the optimization hypothesis. Although we cannot in general say that these properties get rid of the serial correlation problem, the correlation statistics for our model does show that residuals are not serially correlated

Corporate taxation and exports

The paper analyses the relationship between corporate taxes and exports at firm level. We use an integrated dataset that combines, for the period 2004-2006, survey data(Indagine sulle Imprese Manifatturiere) and company accounts for the manufacturing sector to estimate a Probit and a Tobit model. Our results suggest that export participation as well as export intensity increase with corporate taxation. Consistently with recent developments of the corporate tax incidence theory, this finding can be traced out to the greater ability of exporting firms to shift the tax burden on international markets, compared to domestic firms. Calculation of the average and marginal corporate tax rates uses the methodology recently developed by Egger et al. (2009) which allows deriving firm-specific effective corporate tax rates

A Two-Country NATREX Model for the Euro/Dollar

This paper develops a NATREX (NATural Real EXchange rate) model for two large economies, the Eurozone and the United States. The NATREX approach has already been adopted to explain the medium-long term dynamics of the real exchange rate in a number of industrial countries. So far, however, it has been applied to a one-country framework where the "rest of the world" is treated as given. In this paper, we build a NATREX model where the two economies are fully specified and allowed to interact. Our theoretical model offers the basis for empirical estimation of the euro/dollar equilibrium exchange rate that will be carried out in future research. JEL classification: F31; F36; F4

Elasticity of substitution and the slowdown of the Italian productivity

In Saltari et al. (2012, 2013) we estimated a dynamic model of the Italian economy. The main result of those papers is that the weakness of the Italian economy in the last two decades has been the total factor productivity slowdown. The aim of this paper is to investigate the roots of this slowdown. Specifically, we want to analyze the specific pattern of technical progress in determining the TFP dynamics. This analysis can not be done with the Cobb-Douglas technology but requires the employ of a CES function which allows to distinguish between the direction and the bias of technical progress. We employ a CES specification embodying both labor- and capital-augmenting technical change, with a σ less than 1. We obtain three main results. 1) There seems to have been a structural break around the mid-nineties in the direction and bias of technological change; 2) The first half of the sample features a labor-augmenting technical change and a capital bias; 3) In the second part of the sample both these characteristics seem to disappear, and factor endowments evolution assumes a key role. This last fact may be view as one of the potential causes of the Italian productivity stagnation