Current Account Composition and Sustainability of External Debt

If an economy runs a current account (CA) deficit and finances it via a corresponding net inflow of equity capital the external debt (ED) does not change, i.e.: the CA deficit does not add to ED. This is no paradox. It simply comes from the definition of CA deficit and ED and points to different degrees of sustainability of CA deficits according to the way they are financed and to the composition of the CA itself. By the evaluation of the determinants of interest rates spreads vis à vis US lending rates we assess the sustainability of CA deficits. We find that FDI net inflows (proxy of equity capital) allow emerging economies to sustain larger CA imbalances with respect to CA deficits financed by inflows of more liquid assets. Equity capital is a way to finance the CA. It does not contribute to the ED and it affects the solvency assessment of a country.Equity capital, FDI, CA deficit, external debt

Current account composition and sustainability of external debt (I)

If an economy runs a current account (CA) deficit and finances it via a corresponding net inflow of equity capital (belonging to foreign direct investment (FDI) or to portfolio investment) the external debt (ED) of the country does not change, i.e.: the CA deficit does not add to ED. This is no paradox and simply comes from the definition of CA deficit and external debt. Nonetheless, the implication of this is rather relevant since it points to different degrees of sustainability of CA deficits according to the way they are financed and to the composition of the CA itself. By the evaluation of the determinants of interest rates spreads of a country vis à vis US lending rates we assess the sustainability of CA deficits and we find that the extent of FDI net inflows (proxy of equity capital) allow emerging economies to sustain imbalances which are larger with respect to the case in which the CA deficit is financed by inflows of other more liquid assets. In other words the differential treatment of equity capital as a way of financing the CA, but not contributing to to the ED of a country, is no fiction and affects the solvency assessment of a country. This is a first result of a larger research on the effects of the composition of the CA on the solvency of an economy

Saving and Investment in Euroland, the EU and the enlarged EU

The Feldstein-Horioka puzzle has been recently included among the six major puzzles of international economics. It is a paradox that belongs to the large group of home biases that have become stylized facts. We investigate the F-H puzzle according to different definitions of Europe and by introducing a more suitable investment variable that results after netting out FDI. We find that the F-H co¢cient decreases in all cases in whcih we adopt the correct investment definition. Over time we see a decrease of the F-H coe¢cient during the 1980’s and an increase over the 1990’s as a proof that the Maastricht Treaty discipline has made current account targeting biting. This does not happen for opting out and Eastern Europe countries

Country size and the price of tradeables: is there any relationship beyond wishful thinking?

The existence of transport costs among countries makes prices of tradables diverge. When the market structure is a differentiated oligopoly the prices of tradables increase as a country get larger and/or richer. In a framework of economies of scale-di¤erentiation-monopolistic competition a less definite result can be found, since it all depends on the level of transport costs and the degree of openess. First we go through some theoretical aspects of these different approaches. Then, we provide empirical tests that may be able to discriminate among the two competing approaches. The results show that a relationship exists between size, percapita incomes and prices of tradables in countries separated by some transport cost. As a country is larger prices are lower, yet they become higher if percapita income is higher

Essays in Applied Insurance Economics

The papers included in this thesis deal with a few aspects of insurance economics that have seldom been dealt with in the applied literature. In the first paper I apply for the first time the tools of the economics of crime to study the determinants of frauds, using data on Italian provinces. The contributions to the literature are manifold: -The price of insuring has a positive correlation with the propensity to defraud -Social norms constraint fraudulent behavior, but their strength is curtailed in economic downturns -I apply a simple extension of the Random Coefficient model, which allows for the presence of time invariant covariates and asymmetries in the impact of the regressors. The second paper assesses how the evolution of macro prudential regulation of insurance companies has been reflected in their equity price. I employ a standard event study methodology, deriving the definition of the “control” and “treatment” groups from what is implied by the regulatory framework. The main results are: -Markets care about the evolution of the legislation. Their perception has shifted from a first positive assessment of a possible implicit “too big to fail” subsidy to a more negative one related to its cost in terms of stricter capital requirement -The size of this phenomenon is positively related to leverage, size and on the geographical location of the insurance companies The third paper introduces a novel methodology to forecast non-life insurance premiums and profitability as function of macroeconomic variables, using the simultaneous equation framework traditionally employed macroeconometric models and a simple theoretical model of insurance pricing to derive a long term relationship between premiums, claims expenses and short term rates. The model is shown to provide a better forecast of premiums and profitability compared with the single equation specifications commonly used in applied analysis

The value and price of a "too-big-to-fail" guarantee: evidence from the insutance industry

This paper analyzes the impact of the evolution of the regulation dealing with systemically important insurance groups, using an event study methodology. The results show that investors were able to detect which companies were to be designated well ahead of the publication of the list. Most importantly, after an initial positive reaction, consistent with the expectation of a \u201ctoo-big-to-fail\u201d implicit subsidy, the disclosure on how the capital charges for systemic insurers would be calculated led to sizeable negative abnormal returns for the entities concerned. Leverage plays a key role in driving investors\u2019 reaction; more leveraged entities experience higher abnormal returns when the expectation of a TBTF guarantee arises and lower ones when information on the size of the capital charges is revealed

Current Accounts Dynamics in new EU members: Sustainability and Policy Issues

Current accounts;System of payments;International money and finance;Transition;enlargement;Macroeconomics

A New Look at the Feldstein-Horioka Puzzle using an Integrated Panel

We use a panel of 14 European countries to take a fresh look at the so-called Feldstein-Horioka puzzle on the high correlations between savings and investment observed within countries. A large literature has emerged to investigate this issue, using both individual country-by-country data and panels constructed by pooling data from several countries although the answers remain by and large elusive. Since we argue that the savings and investment series in our panel are integrated of order one, we use the recently developed theory of panel unit roots and cointegration to look at the relationship between savings and investment. Our particular contributions are (a) to consider the puzzle comprehensively, using both time series and panel methods for integrated series; (b) to consider subsets of countries in the panel; and (c) to apply tests of the hypothesis to various disaggregates and transformations of the core datasets, with our particular interest centering on the implications for fiscal policy. We also interpret the findings of our tests in the light of the likely presence of cross-country cointegration (which is known to affect the properties of the tests for unit roots and cointegration