Papers by Pasquale Foresti
Social Science Research Network, May 1, 2019
SSRN Electronic Journal, 2021
JCMS: Journal of Common Market Studies, 2021
The development of effective risk sharing mechanisms is one of the main passages for the success ... more The development of effective risk sharing mechanisms is one of the main passages for the success and longevity of a monetary union. In this paper, we study risk sharing, measured as income and consumption smoothing, in the EMU. As we employ time-varying estimations, we are able to retrieve time patterns of risk sharing for each member country and to compare them with the degree of economic asymmetry within the EMU. Other than documenting the need for stronger risk sharing mechanisms in the EMU, our results also suggest that much more attention should be dedicated to fostering homogeneity in risk sharing across member countries. We document the existence of increasing heterogeneity in the risk sharing capacity between member countries that can potentially exacerbate and amplify the impact of asymmetric shocks and further destabilize the EMU.
Risk-sharing is a crucial issue in order to evaluate the performance of a monetary union. By impl... more Risk-sharing is a crucial issue in order to evaluate the performance of a monetary union. By implementing conventional econometric techniques, this paper intends to estimate the degree of risk-sharing through the cross-ownership of assets within 11 European countries in the period 1971–2014. We show that risk-sharing has been increasing after the launch of the euro due to increased cross-ownership of assets. Nevertheless, we also show that despite the extreme needs for adjustment mechanisms as a reaction to asymmetric shocks in the EMU during the crises, the estimated market risk-sharing mechanism seems to have remained marginal in this period. We also show that the degree of asymmetry (potential benefits from risk-sharing) has declined with the start of the EMU, but it has sharply increased during the crises period. This implies that EMU countries have needed good functioning risk-sharing mechanisms during the crisis, while in this period their estimated performance does not seem t...
The aim of the paper is to evaluate the robustness of the theory that claims for restrictive effe... more 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.
Review of World Economics, 2017
The recent dynamics characterizing the Eurozone economy suggest the existence of a new policy tri... more The recent dynamics characterizing the Eurozone economy suggest the existence of a new policy trilemma faced by its member countries. According to this policy trilemma, there is a trade-off between free capital mobility, financial stability and fiscal policy flexibility. In this paper, we analyze the foundations of such a trade-off and, based on the data for 11 Eurozone countries, present an empirical investigation on the existence of the trilemma. The results highlight the existence of the trade-off, with some differences between member countries. The existence of this trilemma in the Eurozone provides arguments for implementing centralized financial supervision together with fiscal and monetary reforms that should strengthen the currency union. Keywords EMU Á Policy trilemma Á Eurozone Á Free capital mobility Á Fiscal policy Á Financial stability Á Financial crisis JEL Classification E61 Á F41 Á C21 Á C23
Journal of Economic Behavior & Organization, 2020
In this paper, we extend the behavioral macroeconomic model proposed by De Grauwe (2011) by inclu... more In this paper, we extend the behavioral macroeconomic model proposed by De Grauwe (2011) by including fiscal policy. In this model, agents have limited cognitive capabilities and use simple heuristics to forecast output and inflation. 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 optimism and pessimism (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 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 output gap and the stabilization of public debt. We also evaluate our model at the zero lower bound and find that the lower the inflation target, the more likely the system can be gripped in a deflationary spiral that is dynamically unstable and characterized by chronic pessimism and exploding public debt.
Journal of Economic Surveys, 2017
In this paper, the literature on the interaction between monetary and fiscal policies in a moneta... more In this paper, the literature on the interaction between monetary and fiscal policies in a monetary union is surveyed. By adopting the concept of symbiosis as a starting point, the paper highlights the importance of uncertainty, policy makers' preferences and targets. Then, the role of commitment to policy rules and coordination is addressed. The analysis also focuses on the importance of the data considered for the generation of the policy mix. As a final step, the paper discusses the main results in the literature on public debt management in a monetary union. All the reported theoretical results are then adopted to retrieve policy and institutional implications for the European Monetary Union.
Economics Letters, 2016
In this paper we suggest that Eurozone countries face a policy trade-off among: 1) a common rule ... more In this paper we suggest that Eurozone countries face a policy trade-off among: 1) a common rule imposing co-movements in fiscal policy; 2) financial stability; and 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 reduced the capacity of national governments to deal with asymmetric shocks and became incompatible with either free capital mobility and/or financial stability.
International Journal of Monetary Economics and Finance, 2013
In this article we study the conduct of monetary policy by adopting a monetary union model in whi... more In this article we study the conduct of monetary policy by adopting a monetary union model in which we assume that, departing form the dominant literature, the central bank is directly concerned also about the national fiscal policies. The novelty of our analysis lies in fact that, on the basis of this assumption about the central bank's preferences, we evaluate its stabilisation effort under different scenarios of fiscal policy discipline and coordination in the union. We find that the level of conservativeness of the central bank decreases, while the presence of institutions and tools for the control and the coordination enforcement of fiscal policies are still required. Governments' lack of coordination reduces the fiscal policies stabilisation effort of the central bank, but it increases the monetary authority's reaction to supply shocks.
La determinazione del reddito in economia aperta: L’equilibrio nel mercato dei beni - L’equilibri... more La determinazione del reddito in economia aperta: L’equilibrio nel mercato dei beni - L’equilibrio della bilancia dei pagamenti - L’equilibrio di politica monetaria - Equilibrio simultaneo e interdipendenze dei mercati - Reddito di equilibrio e determinazione del livello dei prezzi. La politica economica in Europa: L’evoluzione storica dell’Unione Monetaria Europea - I fondamenti e l’evoluzione delle politiche economiche in Europa - L’Unione Monetaria Europea oggi - La politica monetaria della Banca Centrale Europea - La politica fiscale in Europa: il percorso teorico - La politica fiscale in Europa: l’esperienza concreta - L’integrazione finanziaria e l’Unione Monetaria Europea - L’unificazione monetaria e il sistema bancario europeo - L’Unione Monetaria Europea e la convergenza regionale - Tendenze e determinanti del tasso di cambio dell’euro - I problemi da affrontare e le prospettive future. Bibliografia.
International Economics and Economic Policy, 2014
In this paper a mu lti-country model is adopted in order to analyze the interaction between monet... more In this paper a mu lti-country model is adopted in order to analyze the interaction between monetary and fiscal policy in a monetary union. The setup allo ws analyzing the consequences for the policy mix when national governments face a budget constraint and take their decisions on the basis of national macroeconomic data, while the central bank focuses on the union-wide average data. Under these circu mstances it is shown that the governments' reaction to monetary policy and to supply shocks is not univocal anymore. This feature also affects the outcome of the Nash equilibriu m.
Contributions to Political Economy, 2014
This paper deals with theoretical foundations justifying alleged expansionary effects of fiscal c... more This paper deals with theoretical foundations justifying alleged expansionary effects of fiscal consolidations. In some European countries there have been episodes of fiscal retrenchments followed by an increase in output (Sweden, Ireland, Denmark, and Finland). These have been taken as a starting point for theories advocating, contrary to the Keynesian tradition, the possibility of a negative sign of the fiscal multiplier. We show that expansionary fiscal consolidations can occur under extreme circumstances: they are not the result of pure fiscal policies, but rather they result from a policy mix in which the central bank's behaviour is crucial. On the basis of this evidence we discuss why, given the current economic scenario, immediate austerity cannot be a plausible way out from the recession in the euro-area countries. JEL Classification: E60; E62; E63 Since the pioneering works by Kahn (1931) and Keynes (1933) concerning the existence of a positive fiscal multiplier, there have been many opponents to this view. The idea that a public-sector deficit can be considered as a powerful instrument for stabilizing income reductions has been increasingly questioned. These criticisms followed the theoretical analysis included in the Treasury View and reemerged with Friedman's monetarist approach to the natural rate of unemployment. This opposition to the Keynesian view has been kept alive by crowding-out arguments, by rational expectations models and by the theories based on Ricardian equivalence. It is worth noting that all these criticisms highlighted a low or zero fiscal multiplier. However, the understanding of the effects of fiscal policies among the critics changed in the 1990s when a newer generation of critics began advocating the existence of negative fiscal multipliers. This approach gave rise to the idea that fiscal consolidations may increase output. We call this line of thinking the 'Non-Keynesian View' (hereafter, NKV) to distinguish it from the 'Keynesian View' (hereafter, KV).
International Journal of Economic Policy in Emerging Economies, 2015
In this paper, we employ a block structured near-vector autoregression in order to compare the re... more In this paper, we employ a block structured near-vector autoregression in order to compare the reactions to euro-area shocks in four New Member States (Bulgaria, Hungary, Czech Republic and Romania) and in the Old Member State of the EU. Thanks to the methodology adopted we also study the effects of national economic policies and their reactions to national shocks in each New Member State. Our analysis highlights that possible asymmetric effects of the ECB's monetary policy cannot be excluded and that the potential accession of the New Member States may increase the level of fiscal indiscipline in the eurozone.
Economics Bulletin, 2003
Monetary policy design in currency unions faces more challenging scenarios like the presence of a... more Monetary policy design in currency unions faces more challenging scenarios like the presence of asymmetric shocks and the higher probability of time inconsistency. An evaluation of the union welfare under a monetary rule and under discretion in these ...
This paper has focused on the relationship between stock market prices and growth. A Granger-caus... more 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 ...
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Papers by Pasquale Foresti