Firms’ precautionary savings and employment during a credit crisis

Can the macroeconomic effects of credit supply shocks be large even in an economy in which the share of credit-constrained firms is small? I address this question using a model with firm heterogeneity, in which the interaction between real and financial frictions gives rise to precautionary cash holdings. Using UK firm-level balance sheet data, I show that firms hoarded cash relative to their assets during the last recession, and cash-intensive firms cut their workforces by less. A quantitative version of the model, disciplined by these data, generates similar dynamics in response to a tightening of firms’ credit conditions. The simulated economy experiences a sizeable fall in aggregate employment and prolonged substitution from capital to cash. Most of the aggregate dynamics are driven by unconstrained firms, pre-emptively responding to changes in credit conditions, in anticipation of future idiosyncratic productivity shocks. The model’s ability to generate predictions in line with the data crucially relies on this precautionary channel

The fragile geopolitical scenario of the Mediterranean and the need for a stronger UE vision

During the last decades the Mediterranean has turned into one of the main geopolitical hotspots where new economic, military and ideological struggles are underway. While the fragile regional security architecture seems governed by a “Hobbesian” state of relations, many drivers of instability and turmoil have arisen, pushing the region into a situation of permanent tension. What appears today is the image of a Mediterranean fragmented into a series of inter-connected geopolitical as well as domestic crises which involve international and regional powers and local, national as well as subnational actors through new proxy wars. The roots of this instability are very complex and dependent on the history and social fabric of this region

Strategizing Toward Irrelevance in Libya

Even before the COVID-19 pandemic, European policies toward post-Gaddafi Libya had been criticized for their ineffectiveness and structural deficiencies. When in early March the European Union (EU) became the epicenter of contagion, the credibility of its security and foreign policy further eroded. Although the coronavirus emergency had the potential to spur European countries toward renewed solidarity and greater coordination, what emerged instead was a tendency to turn inward, forcing uncoordinated national responses to the crisis. This transformation risks speeding up some dynamics already underway, such as contracting European political support for external assistance programs—especially regarding the Middle East and North Africa (MENA)—in the face of the pandemic’s domestic socioeconomic consequences. Indeed, in the medium and long terms, the political dynamics and mechanisms of alliance that have governed the international system to date risk being among COVID-19’s victims. In particular, this could have serious repercussions in crises such as the six-year devastating civil war raging in Libya, where Europe has already been called upon to intervene to stabilize the countr

Stock Market Participation, Inequality, and Monetary Policy

Recent literature has shown that the fraction of liquidity-constrained households in the population critically determines the mix of transmission channels of monetary policy. In this article, we bring a different but important dimension of heterogeneity to the forefront: stock market participation. We show that the stock market participation rate not only shapes the mix of policy channels but also heavily affects the aggregate responses. This happens as direct rebalancing effects and indirect equilibrium effects into investment are both increasing in the number of stock market participants, reinforcing each other. We show this in a quantitative New Keynesian model designed to account for the population share of stock market participants, their position in the income and wealth distribution, and their saving rates. The model implies that, as stock market participation has increased since the 1980s, the power of monetary policy on the real economy has strengthened considerably

In memory of Professor Marcella Motta

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Approximating grouped fixed effects estimation via fuzzy clustering regression

We propose a new, computationally efficient way to approximate the “grouped fixed effects” (GFE) estimator of Bonhomme and Manresa (2015), which estimates grouped patterns of unobserved heterogeneity. To do so, we generalize the fuzzy C‐means objective to regression settings. As the clustering exponent approaches 1, the fuzzy clustering objective converges to the GFE objective, which we recast as a standard generalized method of moments problem. We replicate the empirical results of Bonhomme and Manresa (2015) and show that our estimator delivers almost identical estimates. In simulations, we show that our approach offers improvements in terms of bias, classification accuracy, and computational speed