Italy and the Eurozone Trilemma

Item Type Conference or Workshop Item (Paper)

Italy experiences a triple crisis in fiscal solvency, banking sector instability with
a high share of non-performing loans, and stagnant growth due to weak competitiveness
and low productivity. Given negative feedback loops, and starting
from bad initial conditions, Italy remains vulnerable to adverse shocks. Using
a DSGE model of Italy, the remaining Eurozone and the rest of the world, we
investigate the effects of a severe, asymmetric recession with a focus on three
alternative scenarios: continued membership in the Eurozone, a ‘benign’ exit,
and an ‘escalating’ exit. With exchange rate flexibility and autonomous monetary
policy, a benign exit yields a sharper recession in the short-run, but faster
recovery thereafter. If an exit also triggers bank-runs and a flight to safety
with a large sell-off of Italian sovereign bonds (escalating exit), the short-run
consequences are much more damaging.

Authors Keuschnigg, Christian; Kogler, Michael; Kirschner, Linda & Winterberg, Hannah
Language English
Subjects economics
HSG Classification contribution to scientific community
HSG Profile Area SEPS - Quantitative Economic Methods
Depositing User Dr. Mirela Keuschnigg
Date Deposited 04 Jul 2019 14:26
Last Modified 04 Jul 2019 14:26


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Keuschnigg, Christian; Kogler, Michael; Kirschner, Linda & Winterberg, Hannah: Italy and the Eurozone Trilemma.

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