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Current Projects

The Causes and Consequences of International Dollar Positions

by Agustín Bénétrix

By the end of 2014, banks and bond investors extended 8 trillion of US dollar credit to non-bank borrowers outside the United States. However, the offshore credit denominated in other main international currencies such as the euro and yen reached $2.5 and $0.6 trillion, respectively (BIS 2015). The central role of US dollar as currency of denomination for international credit motivates this research. Building on previous work on international currency exposures, our goal is to study the cross-country distribution of short and long dollar positions, its determinants and implications.

Public Debt and Relative Prices in a Cross-Section of Countries

by Vahagn Galstyan (with Adnan Velic)

This project examines the effects of debt and distortionary labor taxation on the long-run behavior of the relative price of nontraded goods. At the theoretical level, in a two-sector open economy model it demonstrates that higher public debt, associated with higher taxation, contracts labor supply in both traded and nontraded goods sectors. Relative prices move inversely with respect to the shifts of relative supply, which, in turn, depend on relative factor intensities. At the empirical level, for a panel of advanced economies, it finds statistically significant effects of public debt and taxes on the relative price of nontraded goods, with higher debt and taxes associated with higher relative prices.

Banks Credit and Productivity Growth

by Fadi Hassan (with Filippo di Mauro and Gianmarco Ottaviano)

Financial institutions are key to allocate capital to its most productive uses. This project examines the relationship between productivity and bank credit in the context of different financial market set-ups, by introducing a model of overlapping generations of entrepreneurs under complete and incomplete credit markets. Then, it exploits firm-level data for France, Germany and Italy to explore the relation between bank credit to estimate an extended set of elasticities of bank credit with respect to a series of productivity measures of firms. The estimates show a Eurozone core-periphery divide. The elasticities between credit and productivity in France and Germany are consistent with complete markets, whereas in Italy they are consistent with incomplete markets. The implication is that in Italy firms turn to be constrained in their long-term investments and bank credit is allocated less efficiently than in France and Germany. Hence capital misallocation by banks can be a key driver of the long-standing slow productivity growth that characterises Italy and other periphery countries.

The Political Economy of Reforms in Central Bank Design:
Evidence from a New Dataset

by Davide Romelli

This project has the objective to investigate what accounts for the worldwide changes in central bank design over the past four decades. Using a novel and comprehensive dataset on central bank institutional design, this project employs a political economy perspective to explain the timing, pace and extent of reforms in central banking. By building a dynamic index of central bank independence, the project aims at extending previous indices by (i) capturing the changes in central bank legislative reforms over time and (ii) including a larger set of characteristics that influence the degree of central bank independence. Preliminary results on a sample of 65 countries over the period 1972-2014, show that incentives generated by initial reforms which increased the level of independence, as well as a regional convergence, represent important drivers of reforms in central bank design. At the same time, an external pressure to reform, such as obtaining an IMF loan or joining a monetary union, also increases the likelihood of reforms, while government changes or crises episodes have little impact.

New Goods and International Risk Sharing

by Paul Scanlon

Because consumption growth rates are weakly correlated across countries, standard one-good models indicate that the degree of international risk sharing is low. This project develops a model which identifies another form of risk sharing: the exchange of new goods. In the model, consumers have a love of variety, and the composition of consumption also determines welfare. As a result, the exchange of new goods now constitutes a form of risk sharing; to determine the degree of international risk sharing, comparing consumption growths is not enough.

Economic Development with Integrated Labour Markets

by Michael Wycherley

The integration of the Irish and UK labour markets meant that Irish wages were determined largely by UK wages rather than economic conditions within Ireland. This meant that Ireland found it difficult to follow the standard development strategy of progressing up the value chain from low wage and low skill activities. This project investigates Ireland's alternative strategy of importing productivity via FDI, the implications of relying on outside sources for productivity growth, and the degree to which this strategy is necessary or possible for other European countries.

Recent Publications

“Debt thresholds and real exchange rates: An emerging markets perspective”, Journal of International Money and Finance, forthcoming. (By Vahagn Galstyan , with Adnan Velic).

The price of development: The Penn–Balassa–Samuelson effect revisited”,
Journal of International Economics, volume 102, 2016. (By Fadi Hassan).

“Debt and austerity: Post-crisis lessons from Ireland”, Journal of Financial Stability, volume 24, 2016. (By Patrick Honohan).

“The Sovereign-Bank Diabolic Loop and ESBies”, American Economic Review (P&P), volume 24, 2016. (By Philip R. Lane, with Markus K. Brunnermeier, Luis Garicano, Marco Pagano, Ricardo Reis, Tano Santos, David Thesmar, Stijn Van Nieuwerburgh, and Dimitri Vayanos).

“International Currency Exposures, Valuation Effects and the Global Financial Crisis”, Journal of International Economics, volume 96, 2015. (By Agustín Bénétrix, with Philip R. Lane and Jay C. Shambaugh).

Ups and Downs. Central Bank Independence from the Great Inflation to the Great Recession: Theory, Institutions and Empirics”, Financial History Review, volume 22, 2015. (By Davide Romelli, with Donato Masciandaro).

“Country Size and Exchange Rates”, Economica, volume 82, 2015. (By Vahagn Galstyan).