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We investigate the dynamics of core inflation in Italy, with a special focus on the period of low inflation after 2014, through the lenses of a Phillips curve framework. Composite indicators of the Italian labour and financial market are constructed and included into a Phillips curve. A number of results emerges from the empirical analysis. First, a statistically significant trade-off between core inflation and economic activity is observed, especially when measures of slack are derived from labour market variables. Second, financial indicators can help to better characterize the dynamics of core inflation. Third, when controlling for financial indicators the slope of the Phillips curve turns out to be smaller, except for the case in which it is measured by the measure of slack based on broad labour market conditions. Fourth, a steepening in the Phillips curve emerges in the aftermath of the Global Financial Crisis, while a stabilization is evident at the end of the sample. Fifth, non-linear techniques suggest that weakness in core inflation may be dependent on the level of labour market tightness and of trend inflation especially. These findings have non-negligible implications for modeling and forecasting inflation dynamics in Italy.

We estimate a Bayesian VAR with a detailed characterization of the banking sector for Italy since the 1990s. We use conditional forecasting techniques to retrieve bank capital shocks related to regulatory and supervisory initiatives and quantify their impact on credit supply and economic activity. We study three episodes characterized by increased regulatory/supervisory pressure and large increases in the Tier 1 capital ratio (the discussion on the Basel III reform; the 2011 EBA stress test and capital exercise; and the ECB’s comprehensive assessment and the launch of the SSM). We find evidence of large and persistent shocks to bank capital in all three episodes, which had significant negative effects on loan supply and GDP. Our results are robust to taking account of possible instabilities in the estimated relationships. The analysis focuses on the potential short-run costs of the regulatory/supervisory initiatives and disregards the potentially much larger long-run benefits of high bank capitalization.

Market risk premia play an important role in the transmission of monetary policy. If the transmission were to work asymmetrically for positive and negative shocks, monetary authorities would face a problematic trade-off: a temporary stimulus could boost the economy in the short run, but at the same time sow the seeds of a painful medium-run market reversal (the financial stability dark side" of monetary policy of Stein, 2014). We study the relation between interest rates, credit spreads and output in the U.S. using monthly data and a range of nonlinear dynamic models. We find clear signs of a reduced- form asymmetry, but no evidence in support of the causal mechanism that underpins the `dark side' argument: spreads rise noticeably ahead of economic slowdowns but they do not appear to cause them directly, particularly if they move in response to monetary shocks. This suggests that the asymmetry is best interpreted as a purely predictive relation, with markets being particularly sensitive to bad economic news; and that it creates no complications for monetary policy or for the exit strategy from monetary accommodation.

Italian Abstract: Tra la meta del 2013 e l’estate del 2014 gli indicatori qualitativi comunemente impiegati a fini di analisi della congiuntura economica avevano fornito segnali coerenti con un progressivo rafforzamento della ripresa ciclica. Nello stesso periodo, gli indicatori quantitativi avevano invece continuato a mostrare una persistente debolezza. Il lavoro presenta dapprima evidenza statistica a sostegno dell’ipotesi di un indebolimento della relazione tra le variabili soft e hard per l’economia italiana nel corso della crisi dei debiti sovrani. Successivamente, valuta il fondamento di alcune ipotesi interpretative. I dati individuali dell’indagine trimestrale Banca d’Italia – Sole 24 Ore sulle aspettative di crescita e inflazione inducono a escludere l’ipotesi che il divario tra indicatori qualitativi e quantitativi derivi da effetti di selezione dovuti alla progressiva eliminazione dal campione delle imprese piu in difficolta. La prolungata fase recessiva sembra invece aver contribuito a modificare le aspettative delle imprese, comportando una revisione al ribasso dei piani di produzione da esse considerati “normali”. Le imprese potrebbero percio avere espresso attese favorevoli sulle condizioni cicliche, anche in una fase di debolezza generalizzata dell’attivita produttiva.English Abstract: Between the first half of 2013 and the summer of 2014, survey data pointed to a gradual recovery of economic activity, while the hard data continued to show persistent weakness. After providing statistical evidence to support the hypothesis that, during the sovereign debt crisis, the relationship between soft and hard variables for the Italian economy has weakened, the paper evaluates some possible explanations for this gap. The micro data for the quarterly survey conducted by the Bank of Italy – Il Sole 24 Ore on growth and inflation expectations tend to rule out the hypothesis that the gap between the qualitative and quantitative indicators comes from selection effects due to the progressive exclusion from the sample of economically distressed firms. Furthermore, the prolonged recession seems to have modified firms’ expectations, leading to a downward revision of production plans and the setting of a “new normal” situation. Therefore, firms may still have expressed favorable expectations for the economic outlook in spite of cyclically slack activity.

Inflation in the euro area has been falling steadily since early 2013 and at the end of 2014 turned negative. Part of the decline has been due to oil prices, but the weakness of aggregate demand has also played a significant role. This paper uses a VAR model to quantify the contribution of oil supply, aggregate demand and monetary policy shocks (identified by means of sign restrictions) on inflation in the euro area. The analysis suggests that in the last two years inflation has been driven down by all three factors, as the effective lower bound to policy rates has prevented the European Central Bank from reducing the short-term rates to support economic activity and align inflation with the definition of price stability. Remarkably, the joint contribution of monetary and demand shocks is at least as important as that of oil price developments to the deviation of inflation from its baseline. Country-by-country analysis shows that both aggregate demand and oil supply shocks have driven inflation down everywhere, albeit with varying intensity. The findings stand confirmed after a series of robustness checks.

This paper depicts – from a variety of viewpoints – the degree of indebtedness and potential financial vulnerabilities of households across the Italian regions. Micro-data from several sources suggest that the financial situation of Italian households shows striking differences at geographical level; some of these differences have partly faded in recent years, whereas under other respects no substantial convergence can be detected. The recent evolution has been heterogeneous for the different socio-demographic classes (income quartiles, citizenship, age of the head, etc.), owing to both demand factors from the part of the households, and supply policies from the part of the banks; the latter in particular changed after the inception of the economic and financial crisis.

We revisit the usefulness of long–run money demand equations for the European Central Bank (ECB). First, we address the issue of their instability by performing a model evaluation exercise among different specifications using a recent time–varying cointegration test. A stable relation for euro area M3 is not rejected by data only when accounting for both a speculative motive, represented by domestic and foreign price–earnings ratios, and a precautionary motive, measured by changes in unemployment. Second, relying on this result, we estimate and identify a novel stable specification for money demand which allows us to derive policy implications for the ECB. Excess liquidity matters for both financial and price stability, being more relevant for the former. In particular, M3 overhang is a leading indicator of stock market busts. Finally, we show that our model fits the anomalous behavior of M3 in the Great Financial Crisis.

This paper presents evidence of money non-redundancy in shaping Euro Area business cycle. The dynamic effects of liquidity are evaluated by means of an agnostic approach. Results show that shocks to monetary aggregates permanently raise prices, even if to a different degree depending on the time span and the asset components considered, and have a sizeable short-run effect on output. Liquidity shocks account for a non-negligible share of economic fluctuations. Finally, the linkages with financial markets are examined: the effects of liquidity do not vanish when accounting for financial variables such as the external finance premium, housing wealth, price earnings ratios, long term rate and real exchange rate.