Ricerc@Sapienza

The main aim of our research is to model and estimate the dynamics of an open economy where financial frictions play a crucial role in determining the price of assets, the evolution of financial bubbles and the exchange rate pass-through of export prices. It also aims at identifying the early warning system to adopt in order to prevent financial crises and the monetary and fiscal policies to employ in this environment. Our motivations are twofold: 1) the increasing interest shown for financial frictions by both the economic literature and policy making conflicts with the insufficient attention paid to their effects on asset price dynamics and on the design of monetary and fiscal policies; 2) the literature has neglected the possibility to conceive financial frictions as an organizing explanatory principle of the way the financial sphere affects the real side of the economic system and, in this way, the whole economy¿s dynamics. We will start to overcome these shortcomings by adopting a unifying micro-macro approach, which conceives financial frictions as a key element of economic dynamics, because of its ability to: a) explain asset pricing, including sovereign debt, and the presence of bubbly assets in macroeconomic equilibrium; b) identify the elements which may provide early predictions of financial crises; c) design of optimal monetary and fiscal policies. We will provide sound foundations to our approach by employing: i) ex-ante data collection and evaluation, to derive the empirical stylized facts on financial frictions, asset pricing and macroeconomic dynamics to be replicated by our models; ii) ex-post model evaluation, to be carried out by estimating through Bayesian techniques the developments of our dynamic models and by employing marginal likelihoods to evaluate their fitting abilities; iii) identification and design of the policy prescriptions suggested by our analysis.