Is Latin America an Optimal Currency Area? Evidence from a Structural Vector Auto-regression analysis

This paper evaluates the advisability of a monetary union in Latin America applying the theory of optimum currency areas (OCA). The analysis, based on the traditional OCA criteria, suggests that there is no evidence for any monetary integration in Latin America, even at a sub-regional level. Latin American countries have evidenced a low degree of trade integration and asymmetric co-movements among their shocks. Moreover, important differences in the speed of adjustment and size of shocks are found. Higher policy coordination seems to be necessary before starting any economic integration process in Latin America.

Testing for Granger causality between stock prices and economic growth

This paper has focused on the relationship between stock market prices and growth. A Granger-causality analysis has been carried out in order to assess whether there is any potential predictability power of one indicator for the other. The conclusion that can be drawn is that stock market prices can be used in order to predict growth, but the opposite it is not true.

On the Stock Markets’ Reactions to Taxation and Public Expenditure. LEQS Discussion Paper No. 115/2016 September 2016

In this paper a panel analysis is employed to investigate the effects of governments’ expenditure and taxation on stock market indexes in 11 members of the Eurozone. A significant number of studies have focused on the effects of monetary policy on the Eurozone stock markets, while only a limited number of papers have investigated the effects of fiscal policy on the stock markets. Therefore, we know little, if anything, on the sign and the stability of the stock markets’ reaction to taxation and public expenditure. Our results show that fiscal maneuvers influence stock markets and that, following an increase (decrease) in public deficit, stock markets indexes go down (up). Nevertheless, further analysis shows that the signs of the estimated stock markets’ reactions are not constant over time and that they can change according to the surrounding macroeconomic scenario

Money Demand in the Eurozone: Do Monetary Aggregates Matter?

The definition of money demand and the study of its stability are still relevant issues, as the effects of monetary policies are also analyzed on the basis of the movements in the demand for money. Therefore, understanding the functioning of money demand is extremely important for monetary policy decisions. In this paper we study money demand in the euro-area, investigating if its estimated stability is influenced by the monetary aggregate employed. This aspect is particularly relevant in the context of the European Monetary Union (EMU), as the European Central Bank (ECB) conducts monetary policy on the basis of the broad money aggregate M3 and one of the most relevant problems for monetary policy decisions in this area is the instability of money demand. By employing panel data techniques, we are able to show that the stability of the relation between money demand and its determinants changes depending on the monetary aggregate (M1, M2 or M3) employed as a proxy for money demand. Moreover, money demand is substantially more stable when M2 is considered. Then, by switching from M3 to M2 as the reference monetary aggregate can increase the estimated money demand stability and improve the performance of the ECB’s monetary policy. This result is also confirmed by splitting the sample in two separate groups of countries. Nevertheless, in less stable economies the impact of inflation on money demand is significantly higher, while in more stable economies the role of income is more relevant

On Keynesian effects of (apparent) non-Keynesian fiscal policies

The aim of the paper is to evaluate the robustness of the theory that claims for restrictive effects of expansionary fiscal policy. It shows that such socalled “non-Keynesian effects” may arise as a consequence of a synchronous and opposite monetary policy intervention. The paper demonstrate this conclusion through a stylized model – supported by an empirical investigation on ECB and FED reaction functions - in which Central Banks take into account deficit spending as an element that generate inflation expectations. The econometric analysis shows also that the ECB reacts asymmetrically to deficit spending variations while the FED has a linear reaction to this indicator.Fiscal policy, Monetary policy, Central Banks Policy strategies

Animal spirits and fiscal policy

In this paper, we study the effects of government spending with a behavioral macroeconomic model in which agents have limited cognitive capabilities and use simple heuristics to form their expectations. However, thanks to a learning mechanism, agents can revise their forecasting rule according to its performance. This feature produces endogenous and self-fulfilling waves of optimistic and pessimistic beliefs (animal spirits). This framework allows us to show that the short-run spending multiplier is state dependent. The multiplier is stronger under either extreme optimism or pessimism and reduces in periods of tranquility. Furthermore, the more the central bank focuses on output gap stabilization, the smaller the multiplier. We also show that periods of increasing public debt are characterized by intense pessimism, while intense optimism occurs in periods of decreasing debt. This allows us to show that governments face a trade-off between the stabilization of the animal spirits and the stabilization of public debt. Then, we show that the existence of this trade-off has implications also for the stabilization of the output gap

Fiscal rules, financial stability and optimal currency areas

In this paper we suggest that Eurozone countries face a policy trade-off between: (1) a common rule imposing co-movements in fiscal policy; (2) financial stability; (3) financial integration. We provide empirical evidence documenting the existence of such a trade-off in the period characterized by the financial crisis and by the sovereign debt crisis. Then, we conclude that the intense fiscal rules that have been introduced in the Eurozone after the emergence of the debt crisis can reduce the capacity of national governments to deal with asymmetric shocks and can be incompatible with either free capital mobility and/or financial stability

Interactions of fiscal and monetary policies under waves of optimism and pessimism

In this article we study fiscal and monetary policies interaction under the assumption that agents have limited cognitive capabilities. To this aim, we employ a behavioral New Keynesian model in which agents’ beliefs generate endogenous waves of optimism and pessimism. The role of such waves is studied under three alternative policy setups: fiscal dominance, monetary dominance and no dominance. Output, inflation, government spending and public debt result to be strongly linked to the agents’ beliefs irrespectively of the policy regime. However, under fiscal dominance the system is characterized by more persistent waves of optimism and pessimism. The consequent higher volatility of the system under fiscal dominance also undermines the central bank’s credibility. We show that in order to minimize these negative effects of fiscal dominance, under such a regime governments should focus on public debt stabilization and leave the stabilization of output and inflation to the monetary authority

On Keynesian effects of (apparent) non-Keynesian fiscal policies

The aim of this paper is to evaluate the robustness of the theory that claims restrictive effects of expansionary fiscal policy. It shows that such so-called “non-Keynesian effects” may arise from synchronous and opposite monetary policy interventions. The paper demonstrates this conclusion through a stylized model – supported by an empirical investigation on ECB and FED reaction functions – in which Central Banks consider deficit spending as an element that generates inflation expectations. Econometric analysis also shows that the ECB reacts asymmetrically to deficit spending variations while the FED has a linear reaction to this indicator.Fiscal policy; Monetary policy; Central Banks Policy strategies

Testing for Granger causality between stock prices and economic growth

This paper has focused on the relationship between stock market prices and growth. A Granger-causality analysis has been carried out in order to assess whether there is any potential predictability power of one indicator for the other. The conclusion that can be drawn is that stock market prices can be used in order to predict growth, but the opposite it is not true