RCEA Working Papers Series
If you like to publish your paper in our working paper series, please send it to Marco Savioli at email@example.com and cc our email firstname.lastname@example.org. Please, remember we have been putting a short description of working papers on our website. To see examples, please scroll down on this page. The text should be under 50 words.
See below for the most recent published papers
We identify total factor productivity (TFP) news shocks using standard VAR methodology and document a new stylized fact: in response to news about future increases in TFP, inventories rise and comove positively with other major macroeconomic aggregates. We derive the conditions required to generate a procyclical inventory response by using a wedges approach. We show that the presence of knowledge capital accumulated through learning-by-doing moves the wedges to qualitatively match the empirical behavior. Our findings support the view that news shocks are an important driver of aggregate fluctuations.
A large literature suggests that the expected equity risk premium is countercyclical. Using a variety of different measures for this risk premium, we document that it also exhibits growth asymmetry, i.e. the risk premium rises sharply in recessions and declines much more gradually during the following recoveries. We show that a model with recursive preferences, in which agents cannot perfectly observe the state of current productivity, can generate the observed asymmetry in the risk premium. The model is also successful in generating the growth asymmetry in macroeconomic aggregates observed in the data.
Financial development and financial reforms affect economic growth, but less is known on how this effect varies across different levels of the conditional distribution of the growth rates. We examine this by using panel data for 81 countries for more than 30 years. The findings indicate that financial reforms are important determinants of growth, especially when a country faces relatively low levels of economic growth. We reveal that the components of financial reforms, which are more important for economic growth, are the supervision of banks and the regulation of securities markets.
We use data from three large stores with different pricing formats (EDLP/Hi-Lo/Hybrid) located within a 1-km radius. The data contain both the actual transaction and the actual regular prices, which we combine with two “generated” regular price series and study their rigidity. Regular-price rigidity varies with store-formats because different format stores define regular-prices differently. We interpret the findings in the context of the store pricing format distribution across the US.
This policy brief warns about the risks of discontinuing the policy responses to the COVID19 crisis by pursuing exit strategies too early and/or too sharply. It outlines a comprehensive strategy for limiting such risks globally and offers an in-depth discussion of the European situation.
We propose the information matrix test to assess the constancy of mean and variance parameters in vector autoregressions. We additively decompose it into several orthogonal components: conditional heteroskedasticity and asymmetry of the innovations, and their unconditional skewness and kurtosis. Our procedures detect variation in the autoregressive coefficients and residual covariance matrix of a VAR for the US GDP growth rate and the statistical discrepancy, but they fail to detect any covariation between those two sets of coefficients.
This paper studies models for forecasting day-ahead hourly electricity prices. Forecasts of demand, in-feed from renewable energy sources (RES), fossil fuel prices, and physical flows are all included in linear and nonlinear specifications, ranging in the class of ARFIMA-GARCH models hence including parsimonious autoregressive specifications known as expert-type models. An extended expert model is found to produce accurate point and density forecasts. Using professional and more timely predictions of consumption and RES improves the forecast accuracy of electricity prices more than predictions freely available to researchers
We extend the existing understanding of the relation between oil prices and stock markets in two ways: (1) by evaluating the effects of the oil market on the U.S. stock market, at an aggregate level and for all forty-nine U.S. industry-specific portfolios, and (2) by scrutinizing the dynamic nature of this relation, by fitting a Structural Vector Autoregression (SVAR) specification for a large set of rolling samples with a fixed size. Results indicate that the effect of oil prices on the U.S. stock market depends on the type and timing of the shock.
This paper investigates the extent of convergence club formation in retail gasoline prices in Canada. The findings suggest that the retail gasoline markets are not integrated in terms of requiring multiple numbers of convergence clubs to explain relative price movements across cities. In addition to this, wholesale gasoline prices cities are probably less integrated than retail prices. Key drivers of retail price divergence across cities include distances between cities and the need to be explicit on distinguishing fuel quality.
We empirically investigate the effectiveness of environmental and energy policies, complying with legal requirements or followed voluntarily by firms, on the pro-environmental efforts of 63 listed firms in Italy in the years 2008-2019. Our results show that the social costs of climate change are not internalized by listed companies and that macroeconomic interventions are effective to fight climate change where voluntary actions fail.
This survey provides (i) a historical overview of climate change awareness worldwide, (ii) a guide to the most widely used datasets; (iii) a detailed review of the main socio-economic and climatological determinants of climate change awareness; and (iv) a summary of the main implications of these findings in terms of public policy responses.
We propose a new set of indices to capture the multidimensionality of a country’s institutional quality. Our indices are obtained by employing a dimension reduction approach on the institutional variables provided by the Frazer Institute (2018). We estimate the impact that our measures of institutional quality have on the level and the growth rate of per capita GDP, using a large sample of countries over the period 1980-2015. The empirical evidence points to a significant impact of institutions, especially for low- and middle-income countries.
We examine a theoretical model of liquidity with three assets - money, government bonds, and equity- that are used for transaction purposes. Money and bonds complement each other in the payment system. The liquidity of equity is derived as an equilibrium outcome. Liquidity cycles arise from the loss of conÖdence of the traders in the liquidity of the system. Both open market operations and credit easing play a beneficial role for different purposes.
We undertake Monte Carlo simulation experiments to examine the effect of changing the frequency of observations and the data span on the Phillips, Shi, and Yu (2015) Generalised Supremum ADF (GSADF) test for explosive behavior via Monte Carlo simulations. We find that when a series is characterized by multiple bubbles (periodically collapsing), decreasing the frequency of observations is associated with profound power losses for the test. The empirical relevance of the findings is shown in relation to the US housing market.
In this note, we show that the information matrix test for a multivariate normal random vector coincides with the sum of the two-moment tests that look at the means of all the different third- and fourth-order multivariate Hermite polynomials, respectively. We also exploit the numerical invariance of the test statistic to affine transformations of the observed variables to simulate its exact, parameter-free, finite sample distribution to any desired degree of accuracy for any dimension of the random vector and sample size.
This paper develops a dynamic investment model for satellites and studies the economic consequences of orbital debris for commercial outer-space activities. We find that the optimal quantity of satellites is a negative function of the amount of debris. The paper derives a simple expression for the maximum number of satellites to prevent the Kessler syndrome. The model is simulated to study the effects of a decline in the launch cost and the increasing number of satellites per launch.
We document round price rigidity in runaway inflation: more round prices are less likely to adjust. When they adjust, the average adjustment is large. Thus, price adjustment barriers round prices face, are strong enough to delay price adjustments even in a period when 85% of the prices change every month.
This paper investigates the determinants of the CDS index considering a large set of explanatory variables within a Markov switching model in a sample post-subprime financial crisis up to the COVID-19 pandemic. Results indicate that more than two regimes are significant to model CDS spreads, and the four-regime model is the preferred one. The fourth regime activated during the COVID-19 pandemic and also in high volatility periods
This paper describes the results from a questionnaire administered to students of schools in the Emilia Romagna Region. The results show a significant increase in students’ knowledge following a 10-hour course attended by school teachers and held by personnel of the Bank of Italy.
In this paper, we introduce a new time-domain decomposition to disentangle the financial cycle and the concurrent long swings in economic activity. Based on this approach, we introduce a set of new composite indexes of macro-financial conditions for the euro area and assess their information content. In particular, with reference to the current pandemics, the indicators suggest that most of the GDP contraction has been of short-term, cyclical nature. Yet our evidence suggests that the financial cycle might have currently achieved a peak area. Hence, the risk of further, deeper disruptions is high, particularly in so far as a new sovereign/corporate debt crisis were not eventually avoided
This paper analyzes the macroeconomic and distributional effects of declining labor share as observed during the last decades. We use a neoclassical general equilibrium model with two types of households, workers and capitalists, endowed with a CES production function, in which the distributional parameter matches labor share. We show that both capitalists’ and workers’ income increase as labor income declines depending on the elasticity of substitution between capital and labor. The effect of labor share changes on income distribution does not depend on the elasticity of substitution, and hence, relative income and relative consumption decrease for workers, increasing inequality.
We suggest a multiplicative factor multi-frequency component GARCH model which exploits the empirical fact that the daily standardized forecast errors of standard GARCH models behave counter-cyclical when averaged at a lower frequency. For the new model, we derive the unconditional variance of the returns, the news impact function, and multi-step-ahead volatility forecasts. We apply the model to the S&P 500, the FTSE 100, and the Hang Seng Index. We show that the long-term component of stock market volatility is driven by news about the macroeconomic outlook and monetary policy as well as policy-related news. The new component model significantly outperforms the nested one-component (GJR) GARCH and several HAR-type models in terms of out-of-sample forecasting .
Based on a new survey of German households, we investigate the role that information channels and lifetime experience play in households’ inflation expectations. We show that information channels households use to inform themselves about monetary policy are closely related to their socioeconomic characteristics. These have a major influence on the level of perceived past and expected future inflation. The expected future change in inflation, however, is strongly influenced by individuals' experience of this variable. Overall, households appear to obtain inflation numbers from the media, but their ‘economic model’ is shaped by experience.
This study examines the co-determination of cross-sectional inequality of income and consumption in a setting that allows for intra-family persistence. Estimation of the model delivers measures of inter-generational persistence in conjunction with the variance-covariance structure of all innovations to the income and consumption processes. This structure can be used to construct counterfactual scenarios that restrict different parental influences. We use the model to extrapolate the influence of family background over multiple generations and examine alternative hypothetical steady states for cross-sectional inequality.
We propose improved output (GDP) measures under the assumption that alternative measurements in levels do not systematically diverge from each other over the long run. While economic activity, like many other macroaggregates, arguably displays a strong stochastic trend, one would expect statistical discrepancies to mean-revert. In that case, measurements in levels would share a common trend. Somewhat surprisingly, though, the standard practice is to rely on models that do not impose this common trend. In this respect, one of our main goals is to explore the implications of not doing so for both parameter estimators and smoothed estimates of latent variables.
We develop a game-theoretic model and conduct a survey on Ontarians to understand opposition to mandatory masks during the pandemic. Those who are young, healthy, Canadian-born, less educated, or politically conservative males are more likely to oppose mandatory masks, as are individuals who do not believe in climate change, doctors, or elected officials.
A Bayesian dynamic compositional model is introduced that can deal with combining a large set of predictive densities. It extends the mixture of experts and the smoothly mixing regression models by allowing for combination weight dependence across models and time. A compositional model with Logistic-normal noise is specified for the latent weight dynamics and the class-preserving property of the logistic-normal is used to reduce the dimension of the latent space and to build a compositional factor model. The projection used in the dimensionality reduction is based on a dynamic clustering process which partitions the large set of predictive densities into a smaller number of subsets. We exploit the state space form of the model to provide an efficient inference procedure based on Particle MCMC. Financial applications are also discussed.
We offer two types of evidence on the cost of breaching an implicit contract between the Coca-Cola Company and its consumers, which included a promise of constant quality. First, we document a case in 1930 when the Company chose to avoid quality adjustment by incurring a permanently higher marginal cost of production, instead of a one-time increase in the fixed cost. Second, we study the company’s 1985 introduction of “New Coke” to replace the original beverage. Using the model of exit, voice, and loyalty, we argue that the public outcry that followed New Coke’s introduction was a response to the implicit contract breach .
We empirically investigate the existence of the Environmental Kuznets Curve (EKC) focusing on a sample of 39 countries in the period 1996-2014. Our results show that the inverted U-shaped relationship between environmental stress and economic development holds independently of the quality of political institutions and environment related taxes. Yet an increase in the environmental tax revenue has the expected reducing effect on environmental degradation only in countries with more consolidated democratic institutions, higher civil society participation and less corrupt governments.
Our survey elicits Ontarians’ compliance with current social-distancing regulations and proposed regulations that impose non-compliance fines or grant wage subsidies to stay home. Risk-of-infection variables (health, age, work outside home, regional COVID-19 cases), gender, political beliefs, risk and time preferences all predict compliance. Fines and subsidies effectively promote compliance .
We put forward the time varying parameter SIRD model to track the real-time stance of the Covid-19 pandemic. The model permits a flexible yet computational inexpensive framework using the `autoregressive score modelling’ structure. Results show that countries including US, Brazil and Russia are not able to contain the pandemic yet while Iran and Korea are likely to experience the second wave as of mid June.
We examine the impact of oil supply and demand shocks on gasoline prices and consumer sentiment in the Euro Area. We find that aggregate consumer sentiment deteriorates notably as a response to positive shocks to gasoline prices but is not affected by positive oil-specific demand shocks. In other words, consumer sentiment is affected primarily by unexpected changes in gasoline prices at the pump rather than unexpected changes in crude oil prices.
We investigate recycling, using Italian survey data. People with an interest in environmental issues or belonging to an environmental association recycle more, while people living in an environment they perceive as deteriorated recycle less. We interpret these findings using insights from psychology and behavioral economics.
We study the optimal tax burden on labor and capital in a scale-less prototypical Schumpeterian model with elastic labor. As R&D productivity is decreasing in the size of the economy labor and growth are not positively related however the optimal tax on capital is sizable for standard parameters' values
This paper investigates the relationship between oil prices and stock markets of selected oil importers and oil exporters at the time of the COVID-19 pandemic. It provides robust evidence in favour of energy contagion, in terms of significantly higher correlations between oil and stock markets returns during turbulent phases in the oil market.
We design a series of laboratory experiments designed to investigate the effects of purchasing insurance and pre-filled claim forms on exaggerated loss reporting. Consistent with an ‘entitlement bias’, we find dishonest reporting is more prevalent among the insured than the uninsured. Pre-filled claim amounts only modestly constrain dishonest reporting
A field experiment at seemingly highly competitive Israeli produce markets reveals that female buyers are offered larger and more frequent price discounts than males, especially attractive females. No other buyer characteristic predicts the likelihood or size of a discount. Search costs and vendor price-setting discretion help understand our findings.
This paper shows that there is a simple way to generate statistically significant and economically valuable equity premium predictions in both expansions and recessions: use a forecast combination of one predictor that generates cyclical forecasts and one predictor that generates countercyclical forecasts. A prominent two-predictor forecast combination that performs well is the dividend yield, which delivers better predictions in expansions, and the short rate, which delivers better predictions in recessions.
This paper shows that public attitudes on climate change in Europe over the last decade have evolved according to the “S-shaped” information dissemination model, conditional to various socioeconomic and climatological factors.
by Michel Serafinelli
In this paper spillovers from FDI are identified by comparing TFP among domestic plants in districts where a foreign plant produces and where FDI was licensed but not yet operational. Over the four years starting with the year of the opening, the TFP of domestic plants is 11 percent higher in treated districts
This paper shows that the early stages of the Covid-19 pandemic had a disproportionately negative impact on employment and hours in lower-paying occupations. Workers who were employed in lower-paying occupations in mid-February 2020 experienced larger employment and hours reductions by mid-March 2020 compared to workers who were employed in higher-paying occupations.
This paper explores the impact of economic uncertainty related to global pandemics on the volatility of the S&P GSCI commodity index as well as on the sub-indexes of crude oil and gold. The results show that uncertainty related to pandemics have a strong negative impact on the volatility of commodity markets and especially on crude oil market, while the effect on gold market is positive but less significant.
We examine the long run relationship between European far right, radical left and unemployment. A unique dataset is compiled for 31 European countries that span from 1900 to 2013. It is shown that an increase in unemployment and radical left increase the far-right vote share.
This paper uses a Global VAR model for 28 developed and developing countries to examine the interaction between the global trade imbalances and their impact within the euro area framework. It is found that an expansionary policy of the North euro area and increased competitiveness in the South euro area could alleviate trade imbalances of the debtor euro area economies.
This paper shows proposes a new Bayesian sampling scheme for VAR inference using sign restrictions. We build on a factor model decomposition of the reduced-form VAR disturbances, which are assumed to be driven by a few fundamental factors/shocks. The outcome is a computationally efficient algorithm that allows to jointly sample VAR parameters as well as decompositions of the covariance matrix satisfying desired sign restrictions.
This paper develops a new decomposition of price variance based on the observation that store expensiveness is not universal but varies across consumers depending on the basket they consume. It is found that the ability to choose the cheapest store for one's basket is the main source of variance in consumer savings.
While pay-as-you-go pension systems are political stable due to ratchet effect, funded pension systems are not, as they cannot rely on the same mechanism. By means of a calibrated overlapping generations model, this paper then shows that asset capture which occurred amidst the global financial crisis of 2008 would have likely happened anyway, because asset capture always has political majority. While introducing funding implies delayed gains and immediate costs, the asset capture allows for immediate gains and delayed costs.
The typical model with fully rational agents predicts that about 60% of old-age consumption is financed through private voluntary savings. This is clearly at odds with the observational data. This paper shows that fiscal incentives to saving for old-age are not very effective in raising savings even among the incompletely rational agents. The incentives direct most of the transfers to those agents who need it the least. The key to raising old-age savings is providing agents with a saving vehicle that yields a market return on capital.
This paper shows that economists were not engaged sufficiently in crises studies before the 2008 crisis. However, they responded dramatically to the crisis by switching their focus and efforts to studying and understanding the crisis, its causes and its consequences.
This paper points out that Canada spends more than Italy on health in per capita terms and as a share of GDP and yet Italy’s two main health indicators as measured by life expectancy and infant mortality are better and have improved more than Canada’s in recent years. It is argued that a key difference between Canada and Italy is that Italy spends relatively more on social transfers – particularly pensions.
This paper proposes a covariance matrix estimator based on the l1-regularized approximate factor model. The sparse approximate factor (SAF) estimator allows for weak factors and hence relaxes the pervasiveness assumption generally adopted for the standard factor model. In a portfolio forecasting application, the estimator outperforms alternative portfolio strategies including the 1/N-strategy.
This paper examines the link between worker-job mismatch and productivity. It is found that productivity is dampened most when university educated workers are employed in occupations generally requiring community-college or high school education, thus leaving human capital idle.
This paper shows that increasing inequality and production concentration in superstar firms are linked. Data from 14 European countries shows robust evidence of a positive and significant correlation between concentration and firm-level wage dispersion.