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In this paper we study the allocative (in)efficiency of employment protection in relation to firing costs, in a general equilibrium model with labor market frictions. The optimal firing costs depend on the level of unemployment benefits and the degree of centralized wage bargaining, two features of the labor market that induce downward wage rigidity and trigger inefficient employment separations. When restrictions on firing employees with permanent contracts are inefficiently high, the introduction of temporary contracts improves welfare but does not fully restore efficiency. A quantitative analysis for the Italian economy shows that the firing costs before the recent labor market reforms were 30% higher than the optimal level, implying a consumption loss of almost 2% in the steady state. The introduction of fixed-term jobs in the early 2000’s closed one fourth of the gap between inefficient and efficient allocation, although it led to higher unemployment rates and turnover.

This paper estimates a consumption function for Italy. In addition to permanent income, housing wealth, the interest rate on household loans and an index of credit conditions, our model introduces household net worth split into liquid and illiquid assets. The consumption dynamics are examined by using financial accounts and real national accounts in a Vector Error Correction Model (VECM), estimated from 1975 to 2017. The results show that the marginal propensity to consume out of liquid financial assets – mainly deposits and bonds – is positive and statistically significant, and greater than that for illiquid assets (mainly unquoted shares and insurance and pension assets); we also find that housing wealth has a smaller and significant impact on consumption. As expected, permanent income accounts for a large fraction of consumption, while the effect of the interest rate is negative.

Following the debate on the relationship between business and financial cycle rekindled in the last decade since the global financial crisis, we assess the ability of some financial indicators to track the Italian business cycle. We mostly use credit variables to detect the turning points and to estimate the probability of recession in real time. A dynamic factor model with Markov‐switching regimes is used to handle a large data set and to cope with the nonlinear evolution of the business cycle. The in‐sample results strongly support the capacity of credit variables to estimate the probability of recessions and the implied coincident indicator proves their ability to fit the business cycle. Also in real time the contribution of credit is not negligible compared to that of the industrial production, currently used for the conjunctural analysis.

Housing taxation is a main policy instrument shaping households choices about homeownership and renting as well as the evolution of the housing market. We study the effects of housing taxation in a model with search and matching frictions in the property market and a competitive rental market. We show a new transmission channel of a housing tax reform that works through a “shifting” of the tax burden on secondary homes from landlords to tenants through rental prices. Property taxation affects house prices not only through the change in the user cost but also via the impact on housing rental services, as measured by the rental prices. We calibrate the model in order to estimate the effects of the recent Italian housing market taxation reforms and the extent of property taxes capitalization in house prices. We show that property taxation on owner-occupied dwellings has a negative effect on property and rental prices, whereas taxes on secondary homes have qualitative opposite effects. The simultaneous increase of both these instruments may mitigate the dynamics of prices and rents as well as the change of the ratio between the share of owners and renters, determining a partial capitalization of taxation on prices.

This paper introduces a framework to jointly account for the affordability of the periodic repayment of the housing debt (income constraint) and of the initial deposit (budget constraint). An application to 2006-2012 micro-data on Italian households indicates that the improvement in the ability of the latter to sustain a mortgage was counterbalanced by a tighter budget constraint. The framework can be employed as a tool to assess the impact of macro-prudential policies – like caps on LTVs – on the pool of households who can actual access housing mortgages without running into financial distress: the level and the slope of the ‘mortgage affordability curve’, the curve that shows the share of eligible households at different LTVs provided by the banks, change over time and are affected by the definition of households’ wealth. The 2008-09 crisis lowered the share of eligible families at high LTVs and mildly increased it at lower LTVs. Moreover, we find that mortgage capability worsened more for the middle class and that the decline in Italian LTVs across the period was mainly supply driven, whereas households’ preferences barely changed. Finally, alternative policies affecting mortgage affordability display heterogeneous effects both in enlarging households’ market participation and in fostering safer lending policies.

Financial frictions have become fundamental for studying the business cycle and credit market dynamics. This work adds to the existing literature by introducing a search and matching scheme in the financial market into a cash in advance New Keynesian DSGE theoretical model. We provide an alternative explanation of the degree of incompleteness in the pass-through from policy rate to loan rates depending on credit market tightness, the search costs sustained by banks, and the relative powers of the agents in loan interest rate bargaining. The model is able to reproduce the countercyclical behaviour of the credit spread with respect to a positive technology shock. It also proposes a scenario in which a credit shock hits the economy. The model is estimated by using the Bayesian procedures. Finally, since there is still some disagreement about the theoretical mechanism by which the interest rate on loans is derived, we survey and compare these theoretical devices with that proposed by this paper.

By introducing search and matching frictions in both the labor and the credit markets into a cash in advance New Keynesian DSGE model, we provide a novel explanation of the incomplete pass-through from policy rates to loan rates. We show that this phenomenon is ineradicable if banks possess some power in the bargaining over the loan rate of interest, if the cost of posting job vacancies is positive and if firms and banks sustain costs when searching for lines of credit and when posting credit vacancies, respectively. We also show that the presence of credit market frictions moderates the reactions of employment and wages to a monetary shock. Finally, we confirm the finding that pass-through incompleteness has limited short-term impacts on the transmission of monetary policy shocks to output and inflation.

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.