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Withdrawal of Italy from the euro area: Stochastic simulations of a structural macroeconometric model

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  • Bagnai, Alberto
  • Granville, Brigitte
  • Mongeau Ospina, Christian A.

Abstract

This paper assesses the impact on the Italian economy of Italy withdrawing from the euro area by means of stochastic simulations of a macroeconometric model. The model considers the effect of devaluation on output, sovereign debt valuation, and the development of bilateral economic relations between Italy and its major trade partners. The simulation results are consistent with the findings of recent applied research: the Italian economy would follow the V-shaped pattern observed in most currency crises. After an initial period of stress, and provided an appropriate set of countercyclical policy measures is implemented, real GDP would recover and resume growth at a reasonable pace. In particular, while the expected positive impact of nominal exchange rate realignment on external balance would be transitory, higher nominal growth would bring about a persistent reduction in unemployment and the public debt-to-GDP ratio. These results are robust to a set of sensitivity checks, considering a number of adverse circumstances such as exchange rate overshooting, financial panic, supply-side constraints, and the application of retaliatory tariffs.

Suggested Citation

  • Bagnai, Alberto & Granville, Brigitte & Mongeau Ospina, Christian A., 2017. "Withdrawal of Italy from the euro area: Stochastic simulations of a structural macroeconometric model," Economic Modelling, Elsevier, vol. 64(C), pages 524-538.
  • Handle: RePEc:eee:ecmode:v:64:y:2017:i:c:p:524-538
    DOI: 10.1016/j.econmod.2017.04.010
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    2. Malinen Tuomas & Nyberg Peter & Koskenkylä Heikki & Miettinen Sami & Ala-Peijari Jukka & Törnqvist Stefan & Berghäll Elina & Mellin Ilkka, 2018. "How to Leave the Eurozone: The Case of Finland," The Economists' Voice, De Gruyter, vol. 15(1), pages 1-16, December.
    3. Acocella, Nicola, 2020. "To Exit or not to Exit (from the EMU)?," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 73(1), pages 1-20.
    4. Samitas, Aristeidis & Polyzos, Stathis & Siriopoulos, Costas, 2018. "Brexit and financial stability: An agent-based simulation," Economic Modelling, Elsevier, vol. 69(C), pages 181-192.
    5. Cagri Esener & Brigitte Granville & Roman Matousek, 2022. "Choosing the Optimal Tool for Fiscal Adjustment or Living under Fiscal Constraints: Panel Evidence from Selected OECD Countries," Economic Research Guardian, Weissberg Publishing, vol. 12(1), pages 2-29, June.

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    More about this item

    Keywords

    F15; F31; F32; F34; F45; H63; Economic integration; Foreign exchange; Monetary union; Sovereign debt;
    All these keywords.

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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