Sources of economic renewal: from the traditional firm to the knowledge firm

We build on the imperfection of intellectual property rights as the central motivation for the organization of firms. There are several characteristics specific to a theory of the firm grounded on the absence of intellectual property rights: monetary incentive schemes arise naturally as a element of the organization and strategy of the firm, since profits are verifiable; firm's boundaries and the degree of centralization respond to the same economic principle; the sunk cost of physical assets plays a role of 'anchoring' non-patentable knowledge inside the firm, improving the appropriability of intellectual capital. Moreover, the model implies that 'small' changes in primitives (particularly small reductions in entry costs) may have drastic implications in organizations, inducing firms to shift from a strategy of building up physical capital, which improves appropriability, to a strategy of reliance on employee 'empowerment' (under which employees combine equity holding with being fully informed). The former strategy is characterized instead by flat wages and by employees' restricted access to the intellectual capital of the firm. The model may shed light in the theoretical explanation of observed industrial restructuring. JEL Classification: C70, D23, D43, D82, L11, L22, O31

Model-based indicators of labour market rigidity

We derive indicators of labour market flexibility that are comparable across countries and time intervals. Our indicators build on a structural VAR model of real wages, output and unemployment dynamics. We compute our indicators for thirteen OECD countries and for two time periods, and we compare them with existing indicators of labour market flexibility in the literature . The main result of the paper is that we did not find evidence of a closing gap in terms of labour market flexibility between the United States and continental European countries, although our findings suggest that medium-sized and small countries have experienced greater improvements in this regard than the large countries since the mid-eighties. JEL Classification: J20, J21, J41

Inflation dynamics and dual inflation in accession countries: a 'New Keynesian' perspective

This paper examines inflation dynamics in the current EU-accession countries in central and eastern Europe, focusing particularly on the determinants of 'dual inflation', that is, diverging inflation rates for tradable and non-tradable goods. The paper draws on the recently published data for the Harmonized Index of Consumer Prices (HICP) of the Accession countries and, indeed, finds evidence of ' dual inflation' in these economies. To test empirically for underlying determinants, the paper borrows from the recently developed New Phillips curve literature. Overall, domestic factors have systematically a stronger impact upon non-tradable goods inflation whereas international factors have a stronger impact over tradable goods. Furthermore, the results point to the possibly very different effects of exchange rate regimes over tradable and non-tradable goods inflation. On the whole, the findings suggest that the Balassa-Samuelson effect is not a prominent factor behind the current 'experience' of dual inflation in these countries. JEL Classification: E31, E58, F41, P24

Bank and sovereign debt risk connection : [draft december 2012]

Euro area data show a positive connection between sovereign and bank risk, which increases with banks’ and sovereign long run fragility. We build a macro model with banks subject to incentive problems and liquidity risk (in the form of liquidity based banks’ runs) which provides a link between endogenous bank capital and macro and policy risk. Our banks also invest in risky government bonds used as capital buffer to self-insure against liquidity risk. The model can replicate the positive connection between sovereign and bank risk observed in the data. Central bank liquidity policy, through full allotment policy, is successful in stabilizing the spiraling feedback loops between bank and sovereign risk

Long-Run Determinants of Inflation Differentials in a Monetary Union

This paper analyzes the long-run determinants of inflation differentials in a monetary union. First, we aim at establishing some stylized facts relating the regional dispersion in headline inflation rates in the euro area as well as in the main components of the consumer price index. We find that a relatively large proportion of it occurs in the Service category of the EU's harmonized consumer price index (HICP). We then lay out a model of a monetary union with fully flexible prices, the long-run properties of which are analyzed. Our model departs in several respect from the Balassa-Samuelson hypotheses. Our results are in contrast with the result that movements in the real exchange rate are mainly driven by regionally asymmetric productivity shocks in the traded sectors. Our results point instead to relative variations in productivity in the non-traded sector as the primary cause of price and inflation differentials, with shocks to productivity in the traded sector being largely absorbed by movements in the terms of trade in the regional economies. These shocks are also found to largely drive the variability of real wages at the country level.

Macroeconomic propagation under different regulatory regimes: Evidence from an estimated DSGE model for the euro area

The financial crisis clearly illuminated the potential amplifying role of financial factors on macroeconomic developments. Indeed, the heavy impairments of banks’ balance sheets brought to the fore the banking sector’s ability to provide a smooth flow of credit to the real economy. However, most existing structural macroeconomic models fail to take into account the crucial role of banks’ balance sheet adjustment in the propagation of shocks to the economy. This paper contributes to fill this gap, analyzing the role of credit market frictions in business cycle fluctuations and in the transmission of monetary policy. We estimate a closed-economy dynamic stochastic general equilibrium (DSGE) model for the euro area with financially-constrained households and firms and embedding an oligopolistic banking sector facing capital constraints. Using this setup we examine the macroeconomic implications of various financial frictions on the supply and demand of credit, and in particular we assess the effects of introducing risk-sensitive and more stringent capital requirements. Finally, we explore the scope for counter-cyclical bank capital rules and the strategic complementarities between macro-prudential tools and monetary policy. JEL Classification: E4, E5, F4banking, Bayesian estimation, DSGE Models, financial regulation

Definition of price stability, range and point inflation targets: the anchoring of long-term inflation expectations

JEL Classification: E52, E61, E31, E42, E43credibility, definition of price stability, inflation, inflation expectations, nominal anchor

Relevant economic issues concerning the optimal rate of inflation

JEL Classification: D60, E31, E41, E61, H21deflation, downward nominal rigidities, inflation costs and benefits, inflation differentials, price stability

Measurement bias in the HICP: what do we know, and what do we need to know?

The Harmonized Index Of Consumer Prices (HICP) is the primary measure of inflation in the euro area, and plays a central role in the policy deliberations of the European Central Bank (ECB). Among the rationales given for defining price stability as prevailing at some positive measured inflation rate is the possibility that the HICP as published incorporates measurement errors of one sort or another that may cause it to systematically overstate the true rate of inflation in the euro area. The purpose of this paper is to review what is known about the scope of measurement error in the HICP. We conclude that given the scant research on price measurement issues in the EU and the ongoing improvements in the HICP, there is almost no scientific basis at this time for a point (or even an interval) estimate of a positive bias in the HICP. JEL Classification: C43, E31Harmonized Index of Consumer Prices, HICP, measurement error

Assessment criteria for output gap estimates

This paper assesses the statistical reliability of different measures of the output gap for the Euro-11 area and the US using output, inflation and unemployment systems. In order to assess the reliability of an output gap estimate two criteria are adopted. Firstly, the estimate should have forecasting power over inflation. Secondly, the ex post statistical revisions of the output gap should not differ significantly from previously computed measures. As an additional check on reliability, we find out whether the estimate of the output gap is positively correlated with standard measures of capacity utilization. We find that under our multivariate specification, unobservable components (UC) type models of the output gap show temporal consistency between sequential and final estimates and are consistent with known cyclical indicators. On the other hand, our UC models for the output gap have limited forecasting power for inflation, since they underperform an arbitrary autoregressive model. JEL Classification: C32, E32, E37