Lilia Cavallari | University of Roma Tre (original) (raw)
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Papers by Lilia Cavallari
Journal of Macroeconomics
Building on a micro-founded model of a two region-world economy in the tradition of the new open ... more Building on a micro-founded model of a two region-world economy in the tradition of the new open economy literature, this paper analyses the strategic interaction of large wage-setters and the central bank when switching from a regime of uncoordinated national monetary policies to a monetary union. The establishment of a monetary union is shown to favour wage restraint, provided the uni...ed central bank is not too conservative. Wage discipline may reduce equilibrium in‡ation in a monetary union relative to the one under uncoordinated national monetary policies when wage setting is centralised across member countries. JEL codes:E5, F4
This short paper introduces an employment target for trade unions in a model of strategic wage ba... more This short paper introduces an employment target for trade unions in a model of strategic wage bargaining à la
In his seminal contribution on exchange rate crises, Krugman models speculative attacks as optima... more In his seminal contribution on exchange rate crises, Krugman models speculative attacks as optimal market reactions to policy rules that are inconsistent with the inde…nite survival of a …xed nominal parity. Later contributions have shifted the focus of the analysis, modelling exchange rate crises as rational decisions by optimizing policy makers to abandon the peg. This paper analyzes the logical core of the two modelling strategies in terms of arbitrage. We use a generalized version of the †arbitrage rule†…rst discussed by Flood and Garber, that expresses the conditions for a crisis to occur in the metric of the shadow exchange rate. Our arbitrage-based methodology of analysis can be applied to virtually all models of exchange rate crises.
This paper studies the business cycle implications of entry costs in a dynamic stochastic general... more This paper studies the business cycle implications of entry costs in a dynamic stochastic general equilibrium model with rm entry and nominal rigidity. Simulations show that my baseline model matches the dynamics observed in the data fairly well. Remarkably, it overcomes the well-known di¢ culties of business cycle models in reproducing the persistence, smoothness and cyclicality of macroeconomic aggregates. I stress that capital entry costs are essential for these results. Keywords: entry costs, rm entry, business cycle, investment costs. JEL codes: E31; E32; E52 Lilia Cavallari, University of Rome III, DIPES, Via Chiabrera, 199, 00145 Rome, Italy, email: cavallar@uniroma3.it.
This paper provides a DSGE model with firm entry. Simulations show that the model matches the syn... more This paper provides a DSGE model with firm entry. Simulations show that the model matches the synchronization of markups and entry observed in the data while at the same time reproducing empirically plausible moments for key macroeconomic variables. Sticky prices are essential for these results.
This paper studies the role of non-homothetic preferences for monetary policy from both a positiv... more This paper studies the role of non-homothetic preferences for monetary policy from both a positive and a normative perspective. It draws on a dynamic stochastic general equilibrium model characterized by preferences with a variable elasticity of substitution among goods and with price adjustment costs a la Rotemberg. These preferences have remarkable implications for monetary policy. Three main results stand out from a comparison of models with an increasing and a constant elasticity. First, an increasing elasticity induces novel intertemporal substitution effects that amplify the propagation of monetary and technology shocks. Second, it weakens the ability of a simple Taylor rule to attain a given level of macroeconomic stabilization. Third, the smallest welfare losses can be attained by stabilizing both inflation and output, in contrast to the prevailing view - based on models with a constant elasticity - that the best thing the monetary authority can do is to control inflation only.
This contribution introduces multinational production and trade costs in a dynamic open economy i... more This contribution introduces multinational production and trade costs in a dynamic open economy in the tradition of the new open macroeconomics, so as to analyse the impact of exports and foreign direct investments on exchange rates and prices. The mode of foreign market access is shown to play a key role in the international transmission of productivity and policy shocks, such as changes in transport costs and the global monetary stance. A generalised policy of trade liberalisation, by deteriorating the terms of trade of host relative to source countries, is shown to favour consumers in the developed (investing) world. Similarly, an easing of the global monetary stance has asymmetric e¤ects in borrowing and investing countries. A depreciation of the home currency reduces the purchasing power of domestic consumers in open economies that mainly host foreign direct investments.
SSRN Electronic Journal, 2017
Economic Modelling, 2017
This paper provides evidence in support of the hypothesis that fiscal policy is largely anticipat... more This paper provides evidence in support of the hypothesis that fiscal policy is largely anticipated and its effects depend on the extent to which policy is able to affect expectations. Based on a set of 2-country Bayesian VAR models between major European economies, we find that a surprise stimulus triggers expectations of deficit reversals that may crowd out private expenditure. An anticipated stimulus, on the contrary, is found to boost domestic activity in all samples. Moreover, it has positive cross-border effects in 50 percent of the cases. Overall, our findings suggest that fiscal policy is effective when it is not “crowded out” by expectations of reversals. We document such crowding out effects in Italy and France. Finally, we argue that predictability has important consequences for the design of discretionary policy.
Journal of Macroeconomics
Building on a micro-founded model of a two region-world economy in the tradition of the new open ... more Building on a micro-founded model of a two region-world economy in the tradition of the new open economy literature, this paper analyses the strategic interaction of large wage-setters and the central bank when switching from a regime of uncoordinated national monetary policies to a monetary union. The establishment of a monetary union is shown to favour wage restraint, provided the uni...ed central bank is not too conservative. Wage discipline may reduce equilibrium in‡ation in a monetary union relative to the one under uncoordinated national monetary policies when wage setting is centralised across member countries. JEL codes:E5, F4
This short paper introduces an employment target for trade unions in a model of strategic wage ba... more This short paper introduces an employment target for trade unions in a model of strategic wage bargaining à la
In his seminal contribution on exchange rate crises, Krugman models speculative attacks as optima... more In his seminal contribution on exchange rate crises, Krugman models speculative attacks as optimal market reactions to policy rules that are inconsistent with the inde…nite survival of a …xed nominal parity. Later contributions have shifted the focus of the analysis, modelling exchange rate crises as rational decisions by optimizing policy makers to abandon the peg. This paper analyzes the logical core of the two modelling strategies in terms of arbitrage. We use a generalized version of the †arbitrage rule†…rst discussed by Flood and Garber, that expresses the conditions for a crisis to occur in the metric of the shadow exchange rate. Our arbitrage-based methodology of analysis can be applied to virtually all models of exchange rate crises.
This paper studies the business cycle implications of entry costs in a dynamic stochastic general... more This paper studies the business cycle implications of entry costs in a dynamic stochastic general equilibrium model with rm entry and nominal rigidity. Simulations show that my baseline model matches the dynamics observed in the data fairly well. Remarkably, it overcomes the well-known di¢ culties of business cycle models in reproducing the persistence, smoothness and cyclicality of macroeconomic aggregates. I stress that capital entry costs are essential for these results. Keywords: entry costs, rm entry, business cycle, investment costs. JEL codes: E31; E32; E52 Lilia Cavallari, University of Rome III, DIPES, Via Chiabrera, 199, 00145 Rome, Italy, email: cavallar@uniroma3.it.
This paper provides a DSGE model with firm entry. Simulations show that the model matches the syn... more This paper provides a DSGE model with firm entry. Simulations show that the model matches the synchronization of markups and entry observed in the data while at the same time reproducing empirically plausible moments for key macroeconomic variables. Sticky prices are essential for these results.
This paper studies the role of non-homothetic preferences for monetary policy from both a positiv... more This paper studies the role of non-homothetic preferences for monetary policy from both a positive and a normative perspective. It draws on a dynamic stochastic general equilibrium model characterized by preferences with a variable elasticity of substitution among goods and with price adjustment costs a la Rotemberg. These preferences have remarkable implications for monetary policy. Three main results stand out from a comparison of models with an increasing and a constant elasticity. First, an increasing elasticity induces novel intertemporal substitution effects that amplify the propagation of monetary and technology shocks. Second, it weakens the ability of a simple Taylor rule to attain a given level of macroeconomic stabilization. Third, the smallest welfare losses can be attained by stabilizing both inflation and output, in contrast to the prevailing view - based on models with a constant elasticity - that the best thing the monetary authority can do is to control inflation only.
This contribution introduces multinational production and trade costs in a dynamic open economy i... more This contribution introduces multinational production and trade costs in a dynamic open economy in the tradition of the new open macroeconomics, so as to analyse the impact of exports and foreign direct investments on exchange rates and prices. The mode of foreign market access is shown to play a key role in the international transmission of productivity and policy shocks, such as changes in transport costs and the global monetary stance. A generalised policy of trade liberalisation, by deteriorating the terms of trade of host relative to source countries, is shown to favour consumers in the developed (investing) world. Similarly, an easing of the global monetary stance has asymmetric e¤ects in borrowing and investing countries. A depreciation of the home currency reduces the purchasing power of domestic consumers in open economies that mainly host foreign direct investments.
SSRN Electronic Journal, 2017
Economic Modelling, 2017
This paper provides evidence in support of the hypothesis that fiscal policy is largely anticipat... more This paper provides evidence in support of the hypothesis that fiscal policy is largely anticipated and its effects depend on the extent to which policy is able to affect expectations. Based on a set of 2-country Bayesian VAR models between major European economies, we find that a surprise stimulus triggers expectations of deficit reversals that may crowd out private expenditure. An anticipated stimulus, on the contrary, is found to boost domestic activity in all samples. Moreover, it has positive cross-border effects in 50 percent of the cases. Overall, our findings suggest that fiscal policy is effective when it is not “crowded out” by expectations of reversals. We document such crowding out effects in Italy and France. Finally, we argue that predictability has important consequences for the design of discretionary policy.
We generalize the demand side of a Real Business Cycle model introducing non-homothetic preferenc... more We generalize the demand side of a Real Business Cycle model introducing non-homothetic preferences over differentiated final goods. Under monopolistic competition this generates variable markups that depend on the level of consumption. We estimate a flexible preference specification through Bayesian methods and obtain countercyclical markups. The associated closed-economy model magnifies the propagation of shocks (compared to perfect competition or fixed markups) through additional substitution effects on labor supply and consumption. In an open-economy framework, it also generates positive comovements of output, labor and investment and reduces consumption correlation between countries: in particular, a positive shock in the Home
country reduces its markups and improves its terms of trade, which promotes consumption in the Home country but also production in the Foreign country to exploit the increased profitability of exports.
This paper studies the role of non-homothetic preferences for monetary policy from both a positiv... more This paper studies the role of non-homothetic preferences for monetary policy from both a positive and a normative perspective. It draws on a dynamic stochastic general equilibrium model characterized by preferences with a variable elasticity of substitution among goods and with price adjustment costs à la Rotemberg. These preferences-introduced by Cavallari and Etro (2017) in a setup with ‡exible prices-have remarkable implications for monetary policy. Three main results stand out from a comparison of models with an increasing and a constant elasticity. First, an increasing elasticity induces novel intertem-poral substitution e¤ects that amplify the propagation of monetary and technology shocks. Second, it weakens the ability of a simple Taylor rule to attain a given level of macroeconomic stabilization. Third, the smallest welfare losses can be attained by stabilizing both in ‡ation and output, in contrast to the prevailing view-based on models with a constant elasticity-that the best thing the monetary authority can do is to control in ‡ation only.
In his seminal contribution on exchange rate crises, Krugman mod- els speculative attacks as opti... more In his seminal contribution on exchange rate crises, Krugman mod- els speculative attacks as optimal market reactions to policy rules that are inconsistent with the inde…nite survival of a …xed nominal parity. Later contributions have shifted the focus of the analysis, modelling exchange rate crises as rational decisions by optimizing policy mak- ers to abandon the peg. This paper analyzes the logical core of the two modelling strategies in terms of arbitrage. We use a generalized version of the "arbitrage rule" …rst discussed by Flood and Garber, that expresses the conditions for a crisis to occur in the metric of the shadow exchange rate. Our arbitrage-based methodology of analysis can be applied to virtually all models of exchange rate crises.
SSRN Electronic Journal, 2000
We generalize the demand side of a Real Business Cycle model introducing non-homothetic preferenc... more We generalize the demand side of a Real Business Cycle model introducing non-homothetic preferences over differentiated final goods. Under monopolistic competition this generates variable markups that depend on the level of consumption. We estimate a flexible preference
specification through Bayesian methods and obtain countercyclical markups. The associated closed-economy model magnifies the propagation of shocks (compared to perfect competition or fixed markups) through additional substitution effects on labor supply and consumption. In an open-economy framework, it also generates positive comovements of output, labor and investment and reduces consumption correlation between countries: in particular, a positive shock in the Home country reduces its markups and improves its terms of trade, which
promotes consumption in the Home country but also production in the Foreign country to exploit the increased profitability of exports.
Keywords
RBC, variable markups, non-homothetic preferences, international macroeconomics
JEL Codes
E1, E2, E3
Macroeconomic Policymaking in the EMU, 2004
This paper studies the dynamics of output and export margins in the aftermath of external shocks ... more This paper studies the dynamics of output and export margins in the aftermath of external shocks in fixed and floating exchange rate regimes. Using a panel VARX model, it traces the mean responses of output, terms of trade, extensive and intensive margins to real and nominal shocks in 22 developed economies over the period 1988–2011. It finds remarkable differences in the transmission of shocks depending on the exchange rate regimes. Overall, our findings provide novel evidence in support of the stabilization advantages of flexible exchange rates based on their ability to smooth extensive margins. These findings are consistent with the predictions of theoretical models with firm entry.
EMU, Financial Markets and the World Economy, 2001
EMU, Financial Markets and the World Economy, 2001
Monetary Policy, Fiscal Policies and Labour Markets. Macroeconomic Policy Making in EMU, 2004
Italian Institutional Reforms: A Public Choice Perspective, 2008
This chapter analyses the macroeconomic consequences of a “social pact” among the government, tra... more This chapter analyses the macroeconomic consequences of a “social pact” among the government, trade unions and employers’ associations aimed at keeping the growth in domestic wages and prices in line with the government’s inflation target in a country belonging to a monetary union. We demonstrate that an outward-looking social pact which targets union-wide inflation can lead employment at the competitive