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This book presents stimulating new perspectives on three key sets of issues: a fair globalization, the policies that might be adopted in response to protectionist pressures, and sustainable development policies involving G7 and G20 actions to lay the foundations for renewed trust. The individual topics addressed within this framework are wide ranging. Examples include globalization and national inequality, globalization and policies for inclusive growth in developing countries, the sources of controversies regarding trade agreements and their effects, the impact of new U.S. commercial policies on the world trading system, real convergence in the Euro area, and the causes of Brexit. The book comprises a selection of contributions presented at the XXIXth Villa Mondragone International Economic Seminar. In offering contrasting points of view on topics of high current interest, it will appeal to academics, policymakers, and economic experts at institutions.



Global Implications of U.S. Trade Policies for Reducing Structural Trade Imbalances

The aim of this research is to assess the international transmission of trade policies originating in the United States to its major trading partners, most of whom are members of the G20. We began by estimating twenty-one macroeconomic models of the G20 based on the national accounts (by expenditure) from the United Nations Statistical Department. The baseline scenario is based upon a Harrod-Domar model on the supply side and demand equations for household consumption, government and imports. A 21 by 21 world trade matrix was constructed from the bilateral export data also produced by the UN statistical department. This provided a mechanism to estimate the exports of the national and regional models from the trade shares. Based on the new exports, GDP is re-summed and the demand side of the economy is re-estimated. This is continued until the system convergences. The final estimates and the baseline estimates are compared to give an estimate of the impact of the change resulting from the assumptions corresponding to the import policy.
D. Salvatore, F. Campano

The Dutch Disease in Reverse: Iceland’s Natural Experiment

For a long time, abundant natural resources brought Iceland a high and volatile real exchange rate with adverse effects on manufacturing and services. During 2003–2008, another national treasure, the sovereign’s AAA rating, was used by privatized banks to attract foreign capital, elevating the real exchange rate even further. The financial collapse and the associated collapse of the currency in 2008 left the country with a large foreign debt which offset some of the effect of the natural resources on the real exchange rate. In effect, this was the Dutch disease in reverse as witnessed, in particular, by a massive increase in the number of tourists following the financial collapse. This paper discusses the behavior of the exchange rate of the Icelandic króna before and after 2008 as well as its relationship to natural resources, capital flows, output, exports and imports, including tourism.
Thorvaldur Gylfason, Gylfi Zoega

Skill Polarization and Inequality: Are They Real and Inevitable?

This paper examines some of the characteristics and the possible causes of job polarization, a process that has been progressing for some time, but that has only recently become the focus of a more intense attention of economists and policy makers. The paper looks at three different phenomena behind the seemingly increasing divergence between high and low skill jobs: (i) the evolution of the mode of production and the model of organization of the firm, (ii) the evolution of the value chains, that have become longer and more fragmented, more internationally spread, and increasingly dependent on logistics and information technology and, (iii) the reshuffling of professional competences and comparative advantage depending on the new technologies and especially on the so called internet revolution.
Luigi Paganetto, Pasquale Lucio Scandizzo

Global Macroeconomic Effects of Exiting from Unconventional Monetary Policy

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.
P. Cova, P. Pagano, M. Pisani

On the Sources of Political Discontent in Europe

We explore the pattern and sources of discontent when it comes to both the European Union and national governments in Europe in 2006 and 2014. We find that dissatisfaction with the state of the economy primarily affects the level of dissatisfaction with national governments, while unemployment and fear of immigration affects attitudes towards further European integration in 2014.
David Freyr Bjornsson, Gylfi Zoega

Land, Housing, Growth and Inequality

This paper incorporates productive assets, residential land and residential structures in a growth model with two social classes: capitalists, who invest in productive assets and housing but do not work, and workers, who invest only in housing and decide on their labor effort. It is shown that the relative price of land grows in the long run at the same rate as the economy’s GDP, while the quantity of housing services and their price grow slower than it. Moreover, numerical examples show that (i) shifting taxation away from income and towards the property of land enhances long-term GDP growth and leads in the long-run to more equalitarian (more favorable to workers) income and wealth distributions, (ii) a marginal increase in the fraction of investment expenditures in residential structures that is tax deductible reduces income and wealth inequality, (iii) a change in preferences giving more weight in the utility function to residential services leads in the long run to a distribution of income and wealth more favorable to capitalists, (iv) changes in taxation or in preferences increasing the fraction of total investment devoted to the accumulation of residential wealth rather than to the accumulation of productive assets brings about a balanced growth path characterized by a higher wealth-income ratio. Finally, endogenous fluctuations may be generated along the equilibrium trajectory converging to the balanced growth path, in a model where housing wealth and residential land are distinguished from productive capital and only fundamentals (initial endowments, preferences and technologies) drive the economy.
Luigi Bonatti

Globalization and National Income Inequality: Observations and Lessons from the U.S. Experience

Significant changes in the global economy with respect to trade, investment and technology are casting a shadow over the system at a time when concerns about who has benefited from globalization and who has not is affecting the conduct of national economic policies. Widening inequality in many countries, but principally the U.S., is a concern since America is still the world’s largest and in many respects most open economy. A shift away from openness would harm not only emerging market economies, but also create worries for the maintenance of the system. For this reason, exploring what has driven the rising income inequality in the U.S. is important to understand and this paper lays out those trends in the context of broader issues affecting the future of globalization.
Danny M. Leipziger

Sustainable Economic Growth in the Euro Area: The Need for a “Long View” and “Going Granular”

The lacklustre performance of certain euro area Member States, especially in the South of Europe, in terms of productivity growth and real convergence, dates back to the years preceding the adoption of the euro and is hardly related to the introduction of the single currency. To comprehend these trends we need, therefore, a “long view”. Beside factors related to institutional quality, growth in total factor productivity is probably the ultimate precondition for mature economies such as those in the euro area to avoid falling in the non-convergence trap. Firm-level evidence in turn suggests that technology creation/absorption and allocative efficiency are crucial long-run drivers of TFP growth. Growth-enhancing reforms in the euro area, therefore, should be grounded on a sufficient degree of analytical granularity, in particular by acknowledging the policy implications of firm heterogeneity.
Ettore Dorrucci

Does Access to Finance Improve Productivity? The Case of Italian Manufacturing

Many contributions have analyzed the implications of underdeveloped financial markets for economic growth and efficiency of production, emphasizing their role as a source of misallocation and highlighting their negative impact on firm dynamics and innovation. The phenomenon is particularly severe in economies characterized by high reliance on debt financing, asymmetric information and imperfect capital markets. This paper reviews the literature on the link between finance and total factor productivity (TFP) and presents some microeconomic empirical evidence in support of a negative relationship between a firm’s ability to access external funding and its productivity. We exploit financial accounts data from ORBIS and AMADEUS and focus on a sample of Italian manufacturing firms during the period 2005–2015. Our findings show that financing constraints negatively affect firms’ productivity, with important implications at the aggregate level. We also document that the sensitivity of TFP to credit constraints increased significantly as a result of the Great Recession, possibly explaining the stalling post-crisis Italian recovery.
Adele Galasso, Francesco Gerotto, Giancarlo Infantino, Francesco Nucci, Ottavio Ricchi

Is Italy on the Pathway for Achieving Sustainable Development Goals?

In this paper, we investigate the current well-being and the future sustainability of Italy. A general equilibrium model is used to estimate the future evolution according to different scenarios in which selected policies are identified in order to evaluate their potential contribution to the SDG achievement. We provide evidence that in a scenario business-as-usual, Italy will not improve significantly its level of well-being. However, with a set of policies specifically targeted in 2030, the Italian sustainability would increase remarkably especially if all policies were implemented simultaneously.
Lorenza Campagnolo, Davide Ciferri

Incoming Labor-Product Society and EU Regional Policy

This contribute moves from a tentative of labor product taxonomy as opposed to mainstream labor factor, or human capital theory of production. We assume that labor is a product in all those cases where the trade-off between labor and capital blurs: in the case of high and medium-high technology workers, social economy enterprises, self-employment, “social-ethic” and no profit activities, but also in the case of smart entrepreneurship, especially in high and medium high technological sectors, such us start up enterprises. Aim of this paper is to improve analyses and implications of the changes in the EU NUTS 1 regions due to the diffusion of the information/knowledge society. We enlarge the Ex-post Myopic Convergence Model (EMCM) explaining the relative rate of productivity of EU NUTS1 regions, with the inclusion of a new exogenous variable, the share of labor-product on total employment (HTC/Total employment). Coexisting labor product-labor factor interaction in time and by regions, a Labor product-labor factor Interaction Model (LIM) has been specified and quantified starting from the Stone-Ramsey principle. The range of a possible future evolution of the interregional labor division between information technology and digital divide concludes the work.
Martino Lo Cascio, Massimo Bagarani

Globalization and Inclusive Growth: Can They Go Hand in Hand in Developing Countries?

Low-income developing countries (LIDC) have experienced a rapid increase in economic integration since the early 1990s. This chapter builds a dynamic general equilibrium model that captures important structural characteristics of LIDCs—a large agriculture sector, productivity gaps, and limited financial inclusion—to identify the channels through which integration can affect inclusive growth. The model is used to quantify the growth and distributional effects of the economic and financial liberalization in Ghana in the early 1990s. The results suggest that liberalization contributed significantly to Ghana’s growth take-off and poverty alleviation in 1990–2000. However, with limited labor mobility and persistent skill gaps between sectors, the benefits of integration, particularly from the financial liberalization channel, are concentrated in households with more human capital and access to finance, resulting in higher income inequality.
Rupa Duttagupta, Sandra Lizarazo Ruiz, Angelica Martinez Leyva, Marina Mendes Tavares
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