WP 17/05

In “Short-run effects of lower productivity growth. A twist on the secular stagnation hypothesis“, Jean-Paul L’Huillier, with Olivier Blanchard and Guido Lorenzoni, offer a novel explanation of the weak GDP growth observed in the U.S. in the current decade. In their view, while the effects of the legacies of the past (i.e. a weak financial system and fiscal consolidation) have been fading away, expectations about future potential growth have become much less optimistic leading to a temporarily weaker demand. Regression and simulation results suggest that downward revisions of productivity growth may have decreased demand by 0.5% to 1% a year since 2012. If this explanation is correct, it has important policy implications. In particular, as this adjustment comes to an end, demand will pick up and interest rates will increase substantially, more than currently anticipated by financial markets.

WP 17/04

In “Credit Misallocation During the European Financial Crisis“, Fabiano Schivardi, with Enrico Sette and Guido Tabellini, address the question of whether banks with low capital extend excessive credit to weak firms, and whether this matters for aggregate efficiency and economic growth. Using a unique data set that covers almost all bank-firm relationships in Italy during the period 2004-2013, they find that undercapitalized banks were more reluctant to cut credit to non-viable firms. Credit misallocation increased the failure rate of healthy firms and reduced that of non-viable firms. Nevertheless, the negative effects of credit misallocation on the growth rate of healthier firms were negligible. These results show that while banks with low capital can be an important source of aggregate inefficiency in the medium run, they cannot be blamed for having aggravated or prolonged the recession induced by the European financial crisis.

WP 17/03

In “Demand and Supply of Populism“, Luigi Guiso, Helios Herrera, Massimo Morelli and Tommaso Sonno study the determinants of the demand and supply of populism in Europe by making use of individual level data from multiple waves of the European Social Survey. Regarding the demand side, they find that lower income, financial distress and higher economic insecurity, due to exposure to globalization and competition from immigrants, drive the populist vote. Economic insecurity also has an indirect effect on populist voting because it lowers the trust in incumbents. All these variables induce voters to either abstain from voting or, if they do participate, to vote more for populist parties. Aggregating all effects, the authors show that strong negative economic shocks (such as the 2008 crisis still ongoing in several countries) and the collapse of trust in traditional parties they induce, boost the demand for populist policies. Regarding the supply, the paper shows that the same economic variables also caused the entry of populist parties in the political arena. In response to the consensus the populist parties have gained, traditional parties have gradually shifted their platforms towards more populist oriented policies.

WP 17/02

In “Firm-Related Risk and Precautionary Saving Response“, Luigi Guiso, Andreas Fagereng and Luigi Pistaferri , develop a strategy that allows them to simultaneously identify the strength of the precautionary motive and the degree of self-insurance of labor income risk. To address endogeneity problems, they use Norwegian administrative data to identify a credible instrument for consumption risk, that is the variance of firm-specific shocks. At the same time, they provide a framework for studying the precautionary saving response of structural changes in wage insurance provided by the firm. They find a strong precautionary motive, a partial ability to self-insure labor income risk and a large reduction of precautionary savings in response to firm adoption of high powered wage contracts.

WP 17/01

In “Ambiguous Policy Announcements“, Claudio Michelacci and Luigi Paciello study the effects of monetary policy announcements in a New Keynesian model, where ambiguity-averse households with heterogeneous net financial wealth use a worst-case criterion to assess the credibility of the announcements. In this framework, an announcement of a future monetary tightening is always contractionary, while an announcement of a future loosening is less expansionary than under full credibility, and it can even be contractionary if the inequality in wealth is sufficiently pronounced. This occurs because wealthy creditor households are more prone to believe the announcement of loosening than poor, indebted households. Hence there is a fall in perceived aggregate wealth, which, if large enough, can cause a contraction in aggregate demand. To assess the relevance of this mechanism the authors analyze the start of the ECB’s practice of offering forward guidance in July 2013. They show that households’ inflation expectations have responded in accordance with the theory. Calibrating their model to match the entire distribution of European households’ net financial wealth, they find that forward guidance is contractionary, and particularly so when households do not feel liable for the public debt.