Italy in the Eurozone

Christian Keuschnigg, Linda Kirschner, Michael Kogler () and Hannah Winterberg

No 15040, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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: Italy; Competitiveness; Sovereign debt; Bad loans; Bank recapitalization; Eurozone crisis (search for similar items in EconPapers)
JEL-codes: E42 E44 E60 F30 F36 F45 G15 G21 (search for similar items in EconPapers)
Date: 2020-07
New Economics Papers: this item is included in nep-dge, nep-mac and nep-opm
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Working Paper: Italy in the Eurozone (2020)
Working Paper: Italy in the Eurozone (2020)
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