Withdrawal of Italy from the euro area: Stochastic simulations of a structural macroeconometric model ☆
http://www.sciencedirect.com/science/article/pii/S0264999316308689
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Open Access
Highlights
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- We simulate the impact on the Italian economy of withdrawal from the euro area.
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- The model endogenises sovereign spread dynamics and balance sheet effects.
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- Due to banking crisis, nominal realignment has short-run contractionary effects.
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- Reversing austerity policies allows growth to resume after the second year.
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- Results are robust to different types of adjustment, with and without overshooting.
Abstract
This
paper assesses the impact on the Italian economy of Italy withdrawing
from the euro area by means of stochastic simulations of a
macroeconometric model. The model considers the effect of devaluation on
output, sovereign debt valuation, and the development of bilateral
economic relations between Italy and its major trade partners. The
simulation results are consistent with the findings of recent applied
research: the Italian economy would follow the V-shaped pattern observed
in most currency crises. After an initial period of stress, and
provided an appropriate set of countercyclical policy measures is
implemented, real GDP would recover and resume growth at a reasonable
pace. In particular, while the expected positive impact of nominal
exchange rate realignment on external balance would be transitory,
higher nominal growth would bring about a persistent reduction in
unemployment and the public debt-to-GDP ratio. These results are robust
to a set of sensitivity checks, considering a number of adverse
circumstances such as exchange rate overshooting, financial panic,
supply-side constraints, and the application of retaliatory tariffs.
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