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We evaluate the global macroeconomic effects of fiscal and monetary policy measures to counterbalance secular stagnation by simulating a five-region New Keynesian model of the world economy, calibrated to the United States (US), the euro area (EA), Japan (JP), China (CH), and the rest of the world (RW). The model includes investment in research and development (RD in the short-term, it stimulates US economic activity but reduces foreign activity. Third, in the US an accommodative monetary stance, which provokes the crowding-in effect, amplifies the short-term macroeconomic effectiveness of public investment, without inducing additional negative spillovers. Fourth, EA, JP, and CH, by simultaneously increasing public investment and adopting an accommodative monetary policy, counterbalance US short-run negative spillovers and further enhance long-term world growth.

This paper evaluates the domestic and international macroeconomic effects of the Eurosystem’s Asset Purchase Programme (APP) by means of a calibrated three-country dynamic general equilibrium model of the world economy. We find that the APP boosts domestic inflation and economic activity as liquidity increases and long-term interest rates fall. International spillovers are expansionary, and their size depends on the monetary policy stance of partner countries and on the response of international relative prices.

This paper evaluates the macroeconomic impact on the euro area (EA) of the imposition of tariffs by simulating a multi-country New Keynesian model featuring the effective lower bound (ELB) on the EA monetary policy rate. The main results are as follows. First, the bilateral tariff dispute between the United States (US) and China (CH) has positive spillovers on the EA economy, because of favorable trade diversion effects. Second, simultaneous tariff increases between the US and CH and between the US and EA have negative effects on euro-area GDP and (ex-tariff) inflation. The effects are magnified if the ELB binds in the EA. Third, if the elasticity of substitution among tradables is low, the spillovers on euro-area GDP of US-CH trade tensions are negligible if the ELB is not binding, while they become negative if the ELB binds.

We assess the macroeconomic implications for the global economy of different strategies of official reserve management by developing a large scale new-Keynesian dynamic general equilibrium model, calibrated to the euro area, the United States, China and the rest of the world. An increase in the global demand for euros would boost euro area aggregate demand because of the reduction in euro area interest rates (the main benefit associated with the “privilege” of being a global currency). If the higher demand for euros is associated with lower demand for US dollars, then US aggregate demand falls because of higher interest rates, while the external balance improves; countries accumulating reserves continue to run a trade surplus, as exports to the euro area increase. We also compute welfare gains/costs for all economies.

We propose a novel metric to evaluate price developments within the euro area (EA), which involves the decomposition of the overall variability of cross country inflation rates into common and idiosyncratic labor cost and markup components. The analysis yields several interesting results. First, over the period 1978-2015, inflation variability in the EA reflects most of all idiosyncratic (country-specific) developments in unit labor costs (ULC). This sharply contrasts with what we find for the US states, where price dynamics to a much greater extent reflects common developments in costs and profits, consistently with the role played by the greater mobility of capital and labor. Second, when we apply our approach to data for two subgroups of countries, namely Core and Non-core countries, we find that they both display higher intra-group homogeneity, in that the role of the subgroup-specific common components in explaining inflation variability increases, while idiosyncratic developments in ULC become correspondingly less relevant. Third, over the more recent period (1999-2015) in the Core countries the idiosyncratic component due to price markups has become the dominant driver of the variability of inflation, a pattern similar to the one we detect for the US. Our analysis also sheds light on the adjustment mechanisms to asymmetric, or country specific, shocks. Using a panel VAR approach we find that price changes driven by diverging developments of ULC are reflected into trade balance adjustments that are costly from the point of view of the smooth functioning of the currency area.

From the second half of the 1990s, the high saving propensity in emerging economies triggered massive inflows towards safe assets in the United States; then, from the early 2000s, global banks also increased investment in US markets targeting riskier securities. We investigate to what extent the global saving glut and the global banking glut have stimulated risk taking, and find significant effects on credit spreads, market volatility and bank leverage. In a VAR framework, we also detect linkages between foreign inflows, US household indebtedness and house prices, suggesting a substantial risk-taking channel. Our findings provide evidence of the autonomous role of foreign financial flows during the run-up to the global financial crisis.

This paper evaluates the international macroeconomic effects of the Eurosystem’s expanded Asset Purchase Programme (APP) under alternative assumptions about (i) the unwinding of the asset positions accumulated under the APP and (ii) the normalization of the U.S. monetary policy stance. We simulate a five-region New Keynesian model of the euro area (EA) and the world economy (calibrated to the EA, US, China, Japan, and a residual region labelled “rest of the world”, RW). Our results suggest that an early exit from the APP, by severely dampening its effectiveness in stimulating the EA economy, dampens the EA aggregate demand and, therefore, EA imports. The expansionary international spillovers are, as such, reduced. Spillovers from the US to the EA are expansionary but always modest. This being the case, it becomes even more crucial to correctly identify the appropriate point in time to exit EA non-standard monetary policy measures.

The Bank of Italy quarterly econometric model (BIQM) is a large-scale ‘semi structural’ macro-econometric model. It tries to strike the right balance between theoretical rigour and statistical fit to the data. This paper provides an update of the features and the properties of the model, focussing on the empirical estimates of its main equations and on the system responses to various shocks; interactions and feedback mechanisms between the financial and the real side of the economy are also illustrated. The BIQM is primarily used to produce macroeconomic forecasts, but it is also employed – in conjunction with other tools – for evaluating the impact of monetary and fiscal policy options and for counterfactual analyses. Examples of the types of macro-economic analyses carried out with the model are provided.

This paper investigates the role played by total factor productivity (TFP) in the tradable and nontradable sectors of the United States, the euro area, and Japan in the emergence and evolution of today's global trade imbalances. Simulation results based on a dynamic general equilibrium model of the world economy, and using the new EU KLEMS database, indicate that TFP developments in these economies can account for a significant fraction of the deterioration in the U.S. trade balance since 1998, as well as for some of the surpluses in the euro area and Japan. Differences in TFP developments across sectors can also partially explain the evolution of the real effective value of the U.S. dollar during this period. These results highlight the importance of focusing on productivity developments in the nontradable sector of these large, relatively closed economies to understand the evolution of their trade balance and real exchange rate. IMF Staff Papers (2008) 55, 312–325. doi:10.1057/imfsp.2008.5; published online 22 April 2008

Japan has ambitious economic goals: 3 percent nominal growth; 2 percent inflation; and a primary budget surplus. Abenomics has employed the three arrows of monetary, fiscal and structural policies, but the goals remain out of reach. We propose that countercyclical measures be embedded in long-run frameworks that anchor expectations for inflation and public debt. In addition, we argue for an incomes policy to assist reflation. Model simulations suggest that, combined, these proposals would make headway towards the goals, with, on balance, a better chance of success than the more unconventional policy alternatives proposed by Krugman, Svensson, and Turner from a risk-return perspective.

This paper analyzes the operation of the Eurosystem�s public and private assets purchases programmes for monetary policy purposes, quantifying the potential effect on the Italian economy. First we give an exhaustive account of the main transmission channels by which the purchases can be expected to affect economic activity and inflation. Then we assess the effects on the main channels of transmission to the economy and measure the impact on the main macroeconomic variables, applying the Bank of Italy�s quarterly model. For 2015-16 the purchase programme can be expected to make a significant contribution to the growth of output and of prices, of more than 1 percentage point in both cases. Among the channels examined, the largest contribution is judged to come through the depreciation of the euro and the reduction in the interest rates on government securities and bank loans. These effects are comparable in magnitude to those found by studies on the securities purchase programmes conducted in the United States and the United Kingdom.

This paper analyzes the operation of the Eurosystem’s public and private assets purchases programmes for monetary policy purposes, quantifying the potential effect on the Italian economy. First we give an exhaustive account of the main transmission channels by which the purchases can be expected to affect economic activity and inflation. Then we assess the effects on the main channels of transmission to the economy and measure the impact on the main macroeconomic variables, applying the Bank of Italy’s quarterly model. For 2015-16 the purchase programme can be expected to make a significant contribution to the growth of output and of prices, of more than 1 percentage point in both cases. Among the channels examined, the largest contribution is judged to come through the depreciation of the euro and the reduction in the interest rates on government securities and bank loans. These effects are comparable in magnitude to those found by studies on the securities purchase programmes conducted in the United States and the United Kingdom.

This paper evaluates the domestic and international macroeconomic effects of purchases of domestic long-term sovereign bonds by the Eurosystem. To this end, we calibrate a five-country dynamic general equilibrium model of the world economy. According to our results, the sovereign bond purchases would generate an increase in economic activity and in inflation in the euro area of about one percentage point in the first two years by inducing a fall in the long-term interest rates and an increase in liquidity. International spillovers may be nontrivial and expansionary, depending on the monetary policy stance of the partner countries and on the response of international relative prices.

We assess the global macroeconomic implications of different strategies of official reserve management by developing a large scale new-Keynesian dynamic general equilibrium model of the world economy, calibrated on the euro area, the United States, China, Japan and the rest of the world. An increase in global demand for euros would boost euro-area aggregate demand because of the reduction in euro-area interest rates (the main benefit associated with the “privilege” of being a global currency). If the higher demand for euros is associated with lower demand for US dollars, then US economic activity falls because of higher interest rates, which depress domestic aggregate demand, while the external balance improves; countries accumulating reserves continue to run a trade surplus, as exports to the euro-area increase. We also compute welfare gains/costs for all economies.

This work analyzes the macroeconomic impact of the euro-area sovereign debt crisis on the Italian economy by estimating the contribution of the main transmission channels underlying the recessionary dynamics at play since the second half of 2011. By means of a counterfactual analysis undertaken using the Bank of Italy�s quarterly econometric model it is estimated that (i) compared with a �no-crisis scenario�, the GDP loss amounts cumulatively to around 6.5 percentage points in 2012-2013; (ii) the drop in investment stems mainly from a worsening of financing conditions for firms, while the contraction in consumption expenditure hinges chiefly on the negative impact on households� disposable income of the fiscal measures enacted in response to the crisis, as well as heightened uncertainty and lower confidence levels; and (iii) unlike the 2008-09 recession, during the sovereign debt crisis the major impact on economic activity stems from internal factors, which account for about two thirds of the downturn in GDP.

This paper studies equity price volatility in general equilibrium with news shocks about future productivity and monetary policy. As West (1998) shows, in a partial equilibrium present discounted value model, news about the future cash flow reduces asset price volatility. This paper shows that introducing news shocks in canonical dynamic stochastic general equilibrium model may not reduce asset price volatility under plausible parameter assumptions. This is because, in general equilibrium, the asset cash flow itself may be affected by the introduction of new shocks. In addition, it is shown that neglecting to account for policy news shocks (e. g. , policy announcements) can potentially bias empirical estimates of the impact of monetary policy shocks on asset prices.

We study equity price volatility in general equilibrium with news shocks about future productivity and monetary policy. As West (1988) shows, in a partial equilibrium present discounted value model, news about the future cash flow reduces asset price volatility. We show that introducing news shocks in a canonical dynamic stochastic general equilibrium model may not reduce asset price volatility under plausible parameter assumptions. This is because, in general equilibrium, the asset cash flow itself may be affected by the introduction of news shocks. In addition, we show that neglecting to account for policy news shocks (e.g., policy announcements) can potentially bias empirical estimates of the impact of monetary policy shocks on asset prices.

On 4 March 2011, SUERF – The European Money and Finance Forum and the National Bank of Poland jointly organised a conference on the theme of: "Monetary Policy after the Crisis". Following a call for papers with a large number of submissions, the scientific committee selected 9 papers, which were grouped in three sessions addressing the following three research questions: First, what have we learnt from the crisis for the conduct of monetary policy? Second, what have we learnt from the crisis for the coordination of monetary, fiscal and macroprudential policies. And third, how did the Monetary Transmission Mechanism during the crisis function, and what can we expect for the future?

This paper analyzes the macroeconomic impact of Chinas 2009-2010 fiscal stimulus package by simulating a dynamic general equilibrium multi-country model of the world economy, showing that the effects on Chinas economic activity are sizeable: absent fiscal stimulus Chinas GDP would be 2.6 and 0.6 percentage points lower in 2009 and 2010, respectively. The effects are stronger under a US dollar peg because of the imported loose monetary policy stance from the United States. Higher Chinese aggregate demand stimulates higher (gross and net) imports from other regions, in particular from Japan and the rest of the world, and, only to a lesser extent, from the United States and the euro area. However, the overall GDP impact of the Chinese stimulus on the rest of the world is limited. These results warn that a fiscal policydriven increase in Chinas domestic aggregate demand associated with a more flexible exchange rate regime have only a limited potential to contribute to an orderly resolution of global trade and financial imbalances.

This paper analyzes the macroeconomic impact of Chinas 2009-2010 fiscal stimulus package by simulating a dynamic general equilibrium multi-country model of the world economy, showing that the effects on Chinas economic activity are sizeable: absent fiscal stimulus Chinas GDP would be 2.6 and 0.6 percentage points lower in 2009 and 2010, respectively. The effects are stronger under a US dollar peg because of the imported loose monetary policy stance from the United States. Higher Chinese aggregate demand stimulates higher (gross and net) imports from other regions, in particular from Japan and the rest of the world, and, only to a lesser extent, from the United States and the euro area. However, the overall GDP impact of the Chinese stimulus on the rest of the world is limited. These results warn that a fiscal policydriven increase in Chinas domestic aggregate demand associated with a more flexible exchange rate regime have only a limited potential to contribute to an orderly resolution of global trade and financial imbalances.

This paper argues that the lack of timely and decisive policy action to correct domestic and external imbalances contributed crucially to the build-up of financial excesses that led to the financial crisis and the Great Recession. We focus on 2002-07 and perform a number of counterfactual simulations to investigate two central elements of the story, namely: (a) an over-expansionary US monetary policy and the absence of effective macro-prudential supervision, which permitted a prolonged expansion of debt-financed consumer spending; (b) the decision of China and other emerging countries to pursue an export-led growth strategy supported by pegging their currencies to the US dollar, resulting in a huge build-up of their official reserves, in conjunction with sluggish domestic demand in surplus advanced economies characterized by low potential output growth. The results of the simulations lend support to the view that if substantial, globally coordinated demand rebalancing had been undertaken in a timely manner, the macroeconomic and financial imbalances would not have accumulated to the extent that they did and the financial turmoil might have had less drastic global consequences.

We study exchange rate and equity price dynamics, in general equilibrium, in the presence of news shocks about future productivity and monetary policy. We identify a condition under which these asset prices become more volatile without affecting the volatility of the underlying processes-a positive correlation between news and current shocks. This condition also explains why persistent underlying processes generate volatile asset prices. In addition, we show that the correlation between exchange rate and equity returns depends critically on the currency denomination of the equity return and the monetary policy reaction to productivity shocks. The model we set up does well at matching second moments of exchange rate and equity returns for major floating currencies.

We present a model of investment under uncertainty about fundamentals, using a global games approach. Goldstein & Razin (2003) show that there is an information based trade-off between foreign direct investment (FDI) and portfolio investment (PI) which rationalizes some well known stylised facts in the literature - the relative volatility and reversibility of foreign direct investment versus portfolio investment. We extend their result and show that uncertainty about fundamentals does not imply a multiplicity of investment outcomes even when there is an information-based trade-off between direct investments and portfolio investments. In our paper, uncertainty about fundamentals actually helps narrow down the set of possible equilibria. Hence we find that the equilibrium outcome does not exhibit co-ordination failure.

This paper investigates the role played by total factor productivity (TFP) in the tradable and nontradable sectors of the United States, the euro area, and Japan in the emergence and evolution of today's global trade imbalances. Simulation results based on a dynamic general equilibrium model of the world economy, and using the EU KLEMS database, indicate that TFP developments in these economies can account for a significant fraction of the total deterioration in the U.S. trade balance since 1999, as well as account for some the surpluses in the euro area and Japan. Differences in TFP developments across sectors can also partially explain the evolution of the real effective value of the U.S. dollar during this period.

This paper investigates the role played by emerging Asia in the emergence and evolution of the global trade imbalances. Based on simulations in a general equilibrium model of the world economy, we find that a productivity slowdown in the non-tradable sector of these economies in the second half of the 1990s fits regional macroeconomic developments relatively well, but has limited spillover effect to the United States trade balance. In contrast, an increase in the desired level of emerging Asia net foreign assets starting in 2001 not only fits regional developments relatively well, but also has a significant spillover effect to the United States.

We study exchange rate and equity price dynamics, in general equilibrium, in the presence of news shocks about future productivity and monetary policy. We identify a condition under which these asset prices becomes more volatile without afiecting the volatility of the underlying processes|a positive correlation between news and current shocks. This condition also explains why persistent underlying processes generate volatile asset prices. In addition, we show that the correlation between exchange rate and equity returns depends critically on the currency denomination of the equity return and the monetary policy reaction to productivity shocks. The model we set up does well at matching second moments of exchange rate and equity returns for major ∞oating currencies.