Micro and Macro essays in Applied Fiscal Policy

This thesis analysis micro and macro aspect of applied fiscal policy issues. The first chapter investigates the extent to which local budget spending composition reacts to fiscal rules variations. I consider the budget of Italian municipalities and exploit specific changes in the Domestic Stability Pact’s rules, to perform a difference-in-discontinuities analysis. The results show that imposing a cap on the total amount of consumption and investment is not as binding as two caps, one for consumption and a different one for investment. More specifically, consumption is triggered by changes in wages and services spending, while investment relies on infrastructure movements. In addition, there is evidence that when an increase in investment is achieved, there is also a higher budget deficit level. The second chapter intends to analyze the extent to which fiscal policy shocks are able to affect macrovariables during business cycle fluctuations, differentiating among three intervention channels: public taxation, consumption and investment. The econometric methodology implemented is a Panel Vector Autoregressive model with a structural characterization. The results show that fiscal shocks have different multipliers in relation to expansion or contraction periods: output does not react during good times while there are significant effects in bad ones. The third chapter evaluates the effects of fiscal policy announcements by the Italian government on the long-term sovereign bond spread of Italy relative to Germany. After collecting data on relevant fiscal policy announcements, we perform an econometric comparative analysis between the three cabinets that followed one another during the period 2009-2013. The results suggest that only fiscal policy announcements made by members of Monti’s cabinet have been effective in influencing significantly the Italian spread in the expected direction, revealing a remarkable credibility gap between Berlusconi’s and Letta’s governments with respect to Monti’s administration.

The Essays in International Trade and Finance

The first chapter provides the first evidence on the gross capital flows reactions to the financial sector reform. I establish four new stylized facts. First, the reform is associated with an average increase of 0.03pp in both gross capital flows. Second, immediately after the reform both flows decrease, in the long term they stabilize at a higher than the pre-liberalization levels. Third, the short term dynamics is governed by debt flows, while the long term dynamics are driven by all of the components. Finally, only a complex reform leads to a positive effect. The results are robust to a wide range of robustness checks. In the second chapter we develop a novel theory to explain the recent phenomenon of reshoring, i.e. firms moving back their previously offshored business activities. We firstly provide the evidence for the importance of the quality behind the reshoring decision and then, building on Antoniades (2015) we develop a dynamic heterogeneous firms model with quality choice and offshoring. In the dynamic setting the location decision entails a tradeoff between payroll and quality-related costs. In equilibrium reshoring arises as some firms initially offshore, exploit the increase in profits due to lower wages and finally return to the domestic country in order to further increase the quality. The third chapter provides the new evidence suggesting that selling through global production networks might lead to export upgrade. I relate the sector-level GVCs participation indicators derived from the international Input-Output Tables to the data on the unit values of exports at the product-exporter level. We find a strong association between the export prices and forward participation, in particular for the developing countries. We document also a less robust negative relationship between the GVCs backward participation and unit values of exports.

Essays on European economic and monetary integration

This thesis focuses on two aspects of European economic integration: exchange rate stabilization between non-euro Countries and the Euro Area, and real and nominal convergence of Central and Eastern European Countries. Each Chapter covers these aspects from both a theoretical and empirical perspective. Chapter 1 investigates whether the introduction of the euro was accompanied by a shift in the de facto exchange rate policy of European countries outside the euro area, using methods recently developed by the literature to detect "Fear of Floating" episodes. I find that European Inflation Targeters have tried to stabilize the euro exchange rate, after its introduction; fixed exchange rate arrangements, instead, apart from official policy changes, remained stable. Finally, the euro seems to have gained a relevant role as a reference currency even outside Europe. Chapter 2 proposes an approach to estimate Central Bank preferences starting from the Central Bank's optimization problem within a small open economy, using Sweden as a case study, to find whether stabilization of the exchange rate played a role in the Monetary Policy rule of the Riksbank. The results show that it did not influence interest rate setting; exchange rate stabilization probably occurred as a result of increased economic integration and business cycle convergence. Chapter 3 studies the interactions between wages in the public sector, the traded private sector and the closed sector in ten EU Transition Countries. The theoretical literature on wage spillovers suggests that the traded sector should be the leader in wage setting, with non-traded sectors wages adjusting. We show that large heterogeneity across countries is present, and sheltered and public sector wages are often leaders in wage determination. This result is relevant from a policy perspective since wage spillovers, leading to costs growing faster than productivity, may affect the international cost competitiveness of the traded sector.