Gaiotti, E., A. Gavosto and G. Grande, 1997, “Inflation and Monetary Policy in Italy: Some Recent Evidence”, Banca d’ Italia Temi di Discussione No. 310, July.
Galli, G., D. Terlizzese, and I. Visco, 1990, “Short- and Long-Run Properties of the Bank of Italy Quarterly Econometric Model,” in Dynamic Modelling and Control of National Economies, ed. by N. M. Christodoulakis (London, IFAC).
Levy, J. and I. Halikias, 1997, “Aspects of the Monetary Transmission Mechanism Under Exchange Rate Targeting: The Case of France,” IMF Working Paper 97/44, April (Washington: International Monetary Fund).
Nicoletti Altimari S., R. Rinaldi, S. Siviero and D. Terlizzese, 1997, “I Canali di Trasmissione della Politica Monetaria nel Modello Econometrico della Banca d’ Italia”, Banca d’ Italia Temi di Discussione No. 316, September.
Prepared by Ioannis Halikias.
This amount is in net terms, that is, it adjusts for the lower tax liabilities on household interest income.
For instance, for the case of Italy, the estimated consumption function is of the form:
where C is real consumption, DY is real disposable income, R is the real interest rate, W is real household wealth, and Δ is the first difference operator. The first six terms in the equation represent the estimated short-run dynamics, while the term in brackets is the estimated long-run relationship.
See, however, Levy and Halikias (1997) and Dornbusch and others (1998) for a theoretical discussion and empirical evidence on possible differences in the impact on aggregate demand between changes in the interest rate premium and changes in the anchor currency interest rate under the ERM regime.
The large estimated coefficient of the wealth variable may suggest that this variable may be actually capturing part of the substitution effect that is ignored by not including the real interest rate as a direct determinant of the consumption of nondurable goods.
The simulations are included in Nicoletti Altimari and others (1997). See also Gaiotti and others (1997) for very similar simulations (which however focus on inflation rather than on real activity) on the basis of a VAR model.
In the Bank of Italy model, the terms of trade shock affects both real disposable income and real household wealth.
In this regard, one could consider re-estimating the models over successive subperiods, but would very quickly run into problems of degrees of freedom.
Although no data on household financial accounts exist for the case of Greece, it should be noted that mutual funds, generally thought to be held predominantly by households, increased from 3 percent of GDP in the early 1990s to 25 percent of GDP by end-1998.