Italy in the Eurozone

51 Pages Posted: 28 Jul 2020 Last revised: 16 Aug 2020

See all articles by Christian Keuschnigg

Christian Keuschnigg

University of St. Gallen – Department of Economics (FGN-HSG); CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Linda Kirschner

University of St. Gallen

Michael Kogler

University of St. Gallen

Hannah Winterberg

University of St. Gallen

Multiple version iconThere are 2 versions of this paper

Date Written: July 2020

Abstract

Using a DSGE model with nominal wage rigidity, we investigate two scenarios for the Italian economy. The first considers sustained policy commitment to reform. The results indicate the possibility of `growing out of bad initial conditions', if fiscal consolidation is combined with a program for bank recovery and for competitiveness and growth. The second scenario involves a strong asymmetric recession. It is likely to be very severe under the restrictions of the currency union. A benign exit from the Eurozone with stable investor expectations could substantially dampen the short-run impact. Stabilization is achieved by monetary expansion, combined with exchange rate depreciation. However, investor panic may lead to escalation. Capital market reactions would offset the benefits of monetary autonomy and much delay the recovery.

Keywords: bad loans, Bank Recapitalization, competitiveness, eurozone crisis, Italy, Sovereign debt

JEL Classification: E42, E44, E60, F30, F36, F45, G15, G21

Suggested Citation

Keuschnigg, Christian and Kirschner, Linda and Kogler, Michael and Winterberg, Hannah, Italy in the Eurozone (July 2020). CEPR Discussion Paper No. DP15040, Available at SSRN: https://ssrn.com/abstract=3661383

Christian Keuschnigg (Contact Author)

University of St. Gallen – Department of Economics (FGN-HSG) ( email )

Varnbuelstrasse 19
St. Gallen, 9000
Switzerland

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Linda Kirschner

University of St. Gallen ( email )

Bodanstrasse 8
SIAW-HSG
St.Gallen, 9000
Switzerland

Michael Kogler

University of St. Gallen ( email )

Langgasse 1
St. Gallen, 9008
Switzerland

Hannah Winterberg

University of St. Gallen ( email )

Varnbüelstrasse 19
FGN-HSG
St.Gallen, 9000
Switzerland

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