GOVERNMENT INVESTMENT, INFLATION AND GROWTH IN A MIXED ECONOMY:
Theoretical aspects and empirical evidence of the
experience of Italian government corporation investments
by
MARIO BALDASSARRI
Laurea in Economia
Universit' di Urbino
Facolt' di Economia di Ancona
(1969)
SUBMITTED IN PARTIAL FULFILLMENT
OF THE REQUIREMENTS FOR THE
DEGREE OF
DOCTOR OF PHILOSOPHY
at the
MASSACHUSETTS INSTITUTE OF TECHNOLOGY
December 1977
Signature of Author
Signature redacted
--- Department of Economics,
Certified by .....
January 24, 1978
Signature redacted
Thesis Supervisor
Signature redacted
' fll"'-;1
,-Chairman, Department Committee
!,!8 178
-
A~..i
L!ERA flES
--j
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2
GOVERNMENT INVESTMENT, INFLATION AND GROWTH IN A MIXED ECONOMY:
Theoretical aspects and empirical evidence of the
experience of Italian government corporation investments
by
MARIO BALDASSARRI
on
Submitted to the Department of Economics
JanuAry 24, 1978 in partial fulfillment of the requirements
for the Degree of Doctor of Philosophy
ABSTRACT
This thesis is composed of two parts not directly related to one
another.
In part one, a theoretical analysis of a mixed economy is presented.
In this study, a mixed economy is one in which there exist
government owned, competitively managed corporations. A traditional
two-sector growth model is described in Chapter I. Then, in Chapter II,
stabilization policies to control inflation and growth in a closed
economy are analyzed. Chapter III adopts an open economy framework,
and examines both the two-equal-sized country and small country cases.
The focus of these chapters is on the effects that government investment
programs can produce on the economy, especially on the steady state
rates of growth and of inflation.
Optimal control solutions for these economic systems are presented
in Chapter IV. The well known assignment problem is re-examined for a
three-targets, three-instruments framework. The three targets are:
domestic stability, foreign account equilibrium and optimal growth. The
three instruments are: fiscal policy, monetary policy, and government
investment programs.
In this situation, optimal policies are proven to
exist.
Finally, Chapter V briefly comments on the current debate on the
optimal rate of return for government investments.
In part two, an attempt to measure the effects of government corporation investments on the Italian economy is presented. The University
of Bologna econometric model is used as the basic framework of the
analysis, and several simulations are performed on this model.
Clearly,
the results obtained depend on both the validity of the model in interpreting the behaviaral, relations of the Italian economy, and on the particular assumptions made on the behavior of Italian government enterprises.
In fact, the results obtained could be produced by any kind of investment
3
expenditure whose timing is similar to that of the investment expenditure of Italian government corporations.
Thesis Supervisor:
Robert M. Solow,
Institute Professor
4
ACKNOWLEDGEMENTS
For financial support while working on my doctorate, I am indebted
to the Bank of Italy-Stringher-Mortara-Program, the Ente per gli Studi
Monetari, Bancari e Finanziari "Luigi Einaudi" and the Comitato Nazionale Ricerche (CNR). In particular, I wish to express my gratitude to
Federico Caffe and Franco Bonini, the former and current directors of
the Ente Einaudi.
Over the past five years, at M.I.T., at the Catholic University
of Milan and at the University of Bologna, I have been fortunate to
profit from the advice and help of many people.
At M.I.T., Duncan Foley first introduced me to the analytical
framework I developed in the thesis. He also encouraged me to pursue
the topic of government investments. Robert Solow taught me the basic
skills I needed with his courses in macroeconomics, capital theory and
growth theory. He also kindly accepted to be chairman of my thesis
committee. I thank him, first, for his patience and dedication in understanding both the economics and the English of my first drafts; and
second for helping me to put the work into final shape. Franco Modigliani not only agreed to be a member of my thesis committee and to help me
with precious advice, but also created a very friendly and stimulating
environment which made my stay in Cambridge so fruitful and enjoyable.
To him and his wife, Serena, I express my thanks. At the last stage,
Lance Taylor agreed to sit on my thesis committee. I am grateful to him
for his interesting and useful observations. Judith Mason heroically
typed the thesis against my pressing deadlines, and in between the intervals of the best performance ever of the M.I.T. Choral Society. The stunning review in the next morning's Globe was equal to my appreciation of
her typing skills. Finally, I wish to express my thanks to the Saltzbergs.
We could not have wished for a better host-family.
At the Catholic University of Milan and at the University of Bologna
I found an environment most conducive for my research and for my teaching
experience. All colleagues helped create the climate of openness and understanding. A note of thanks is owed to Giancarlo Mazzocchi, who introduced
me to the Catholic University of Milan, and to Nino Andreatta and Romano
Prodi, who gave me the opportunity to work at the University of Bologna.
In particular, Romano's warm friendship was always generous and precious.
He did not stint of his help.
To my friend Mario Draghi I owe a considerable debt. He gave generously of his time while he also was completing a dissertation at M.I.T.
My chapter three on the open-economy shows the benefits of his support.
5
The Slaters kindly hosted me during my last residence in the Boston
area as a thesis writer. Martin edited the thesis and gave it the distinctive British flavor of this final version. Maria supported my last efforts
with warm friendship and delicious warm dinners. Their daughters, Natasha
and Daniela, reminded me how difficult it is to bring up children, but also
how sweet it is to be woken at six o'clock in the morning by a charming
singing child.
Last, but above all, my deep gratitude and love go to my wife,
Gabriella, and to my children, Pierfrancesco and Marta. When we first
came to Cambridge we were a young family with many problems and many hopes.
The warm climate that Gabriella was able to create at any moment , particularly at the most difficult times, allowed us to complete this experience
by confronting still new problems and hopes, but with the splendid certainty
of our growing love.
6
To my wife, Gabriella
7
TABLE OF CONTENTS
Page
Introduction and major conclusions
12
PART I
THEORETICAL ASPECTS OF A MIXED ECONOMY
19
A TWO SECTOR GROWTH MODEL FOR A MIXED ECONOMY
19
Introduction
19
The Two Sector Production Model and the Effects
of Government Expenditure
20
2
The Assets Market
23
3
The Consumption Goods Market
27
Effects of a balanced budget increase in
government expenditure
31
Effects of an increase in government
capital stock
33
The Complete Model - Statics
35
4.1
Fiscal policy performance
36
4.2
An increase in the stock of capital
38
4.3
Effects of an increase in the share of government capital
40
The role of government propensity to consume
40
The Complete Model -
43
Chapter I
1
3.1
3.2
4
4.4
5
Dynamics
Stock and/or flow equilibrium conditions
44
ISSUES IN PRICE STABILIZATION AND GOVERNMENT
INVESTMENT PROGRAMS
46
1
Monetary Policy
46
1.1
Static analysis
48
Effects of an increase in the total stock of
capital
48
5.1
Chapter II
1.1.1
8
1.1.2
Effects of an increase in the share of government capital stock
51
An increase in government propensity to consume
54
Dynamic analysis
54
Effects of an increase in government propensity
to consume
57
Effects of an increase in the share of government capital
60
Fiscal Policy
63
Static analysis
64
2.1.1
Effects of an increase in government propensity
to consume
66
2.1.2
Effects of an increase in government expenditure
69
2.1.3
Effects of an increase in the share of government owned capital
69
Dynamic analysis
71
The effects of an increase in government
propensity to consume
74
2.2.2
A balanced increase in government expenditure
74
2.2.3
An increase in the share of government owned
capital
76
Perfectly Anticipated Inflation and Government
Investment Programs
81
The effects of an increase in the government
share of capital
84
Government investment programs, perfectly anticipated inflation, and the intensity of private
capital
88
Imperfectly Anticipated Inflation and Government Investment Programs
89
1.1.3
1.2
1.2.1
1.2.2
2
2.1
2.2
2.2.1
3
3.1
3.2
4
9
92
4.1
Static analysis
4.2
Dynamic analysis
4.3
Effects of an increase in government propensity
to save
102
4.4
Effects of an increase in the government share
of capital
102
4.5
Government investment programs, imperfectly
anticipated inflation, and the intensity of
private capital
96
106
Expectations on Capital Gains
108
Stabilization policy through monetary and
fiscal tools: statics
112
5.2
Dynamic aspects of fiscal policy stabilization
115
5.3
The role of government capital and expectations
of capital gains
117
GOVERNMENT INVESTMENT PROGRAMS IN THE OPEN
ECONOMY CASE
119
A Two Country Model of International Trade and
The Effects of Government Investments
120
The production sector and the conditions of
capital growth
122
1.2
The assets market
128
1.3
The complete model:
1.4
The balance of payments
1.5
The complete model:
5
5.1
Chapter III
1
1.1
statics
dynamics
133
135
136
The Case of a Small Open Economy
150
2.1
The assets market
150
2.2
Flow demand and supply conditions
155
2.3
The balance of payments
157
2
10
2.4
The complete model
158
2.5
Government investments as a policy tool for
a small open economy
162
THE OPTIMAL GROWTH PATH FOR THE ECONOMY AND
OPTIMAL POLICIES FOR GOVERNMENT INVESTMENTS
165
1
Optimal Growth Path for a Mixed Economy
166
2
Optimal Fiscal and Monetary Policy
171
3
Optimal Policies for Government Investments
Under the Open Economy Case: Three Targets,
Three Guns
179
Chapter IV
Appendix to Chapter IV
Chapter V
1
2
3
OPTIMAL GROWTH PATH FOR A MIXED ECONOMY WITH BOTH CONSUMPTION AND GOVERNMENT CAPITAL ENTERING THE WELFARE
FUNCTION
185
OPTIMAL DISCOUNT RATES FOR INVESTMENT DECISIONS
MYOPIC PRIVATE RULES VERSUS HYPEROPIC GOVERNMENT
RULES
197
Shadow Prices and Time Discounting Rules for
the Financing of Government Projects
198
Private Investments Shadow Price, the Propensity to Invest, and the Role of the Government's Share of Capital
202
The Case of Social Benefits and Social Costs
Entering Government Investment Decisions
204
11
PART TWO
TRENDS AND CYCLES OF THE ITALIAN ECONOMY AND
THE ROLE OF GOVERNMENT CORPORATION INVEST1967-1976
MENTS,
205
INTRODUCTION
206
THE ECONOMETRIC MODEL OF THE UNIVERSITY OF
BOLOGNA - LINK PROJECT: STRUCTURE AND
LINKAGES
210
THE IMPACT OF GOVERNMENT CORPORATION
INVESTMENTS 1967.1 - 1976.IV
216
1
The Investment Process in Italy
216
2
The Effects on Production, Accumulation
and Growth
227
3
The Effects on Employment
255
4
Prices, Wages and Distribution
267
The effects of government corporation investments on Italian inflation
267
4.2
Wages, productivity and unit labor cost
284
4.3
Distribution
297
5
The Foreign Accounts Sector
311
6
The Government Budget
331
Chapter I
Chapter II
4.1
12
INTRODUCTION AND MAJOR CONCLUSIONS
Direct government intervention in a market economy has traditionally been intended to prevent private monopolies from gaining control
of key sectors or to supply public/social goods to the collectivity.
More recently, certain countries, Italy among them, have experienced a
new and different form of intervention - the entry of government corSuch direct intervention appears
porations into competitive markets.
to be an important tool for both stabilization and growth, and has met
with considerable initial success.
This form of intervention gives new
meaning to the term "mixed economy", previously associated with a system
of fiscal-monetary intervention.
The long run capacity for survival of a mixed economy, and the
possibilities of its developing into a full-scale centrally planned
economy
or returning to a fully private one are considered through a
variety of approaches.
Two major issues of the recent debate about the
mixed economy are:
(a)
What kind of growth can such an economy attempt?
How do
income, capital intensity and inflation behave in steady
state conditions?
Is there any room for government cor-
poration investments in the long run?
(b)
To what extent can stabilization through the management of
government corporations be successful for the whole economy?
How does this use of government corporations affect their
own long run efficiency?
How adequate is this tool relative
to more traditional monetary and fiscal policies?
13
These questions remain largely unanswered.
A lack of theory is comple-
mented by shortcomings in the empirical data.
This study, by developing
a theory of the role of government corporate investments, and examining
certain empirical data in the Italian case, attempts to answer some of
the questions.
The analysis is divided into two parts.
In the first part, a
two sector growth model for a closed and an open economy is the basic
theoretical framework.
In Chapter I we present the structure of the consumption/investment goods market and the assets market for the case of a closed economy.
The assets market refers to three different assets:
physical capital.
money, bonds and
Within these markets the government is assumed to
operate with standard fiscal and monetary tools.
However, the govern-
ment is also assumed to own a share of physical capital, and to allocate
its expenditure for the purchase of consumption and investment goods.
Thus, the government plays the role of entrepreneur.
purposes,
For most
the government corporation is assumed to follow the same
managerial rules as private corporations.
The only difference between
the two is the autonomy that the government has in deciding new investments, including the reinvestments of cash flows, too.
In fact, the
economic results of government corporations are considered as part of
the government's budget.
Thus, on the expenditure side, the key vari-
ables are the government propensities to invest or to consume.
These
propensities may differ from the ones of the private sector, and they
may react to different parameters.
Static and dynamic conditions for
14
this system are then explored.
In Chapter II, the relations between inflation, growth, and government investment programs are investigated.
The first two sections
deal with the possibility of using monetary or fiscal policy to stabilize price levels.
Next, stabilization of the rate of inflation within
a perfectly anticipated framework is examined.
Finally, laws of adap-
tive expectations on the rate of inflation and on capital gains or
losses are considered.
The simulations performed in this chapter with
perfectly and imperfectly anticipated inflation, prove that a government investment program may operate in the economy without decreasing
the intensity of private capital.
An additional, and not a merely
reallocative accumulation process, can, therefore, be undertaken.
However, such conditions can only be met by making a trade-off between
more intensive government investment programs and a higher steady rate
of inflation.
In Chapter III, we extend our model to the case of an open economy.
Both a two country and a small country model are discussed.
Clearly, the distinguishing feature of the open economy is the possibility that domestic demand for goods can always be satisfied by imports,
whenever there is a short fall in domestic production.
ernment demand constrains the world market.
Therefore, gov-
In fact, the world produc-
tion is the limit of satisfaction of the two countries' and government's
demand.
As usual, an additional constraint that has to be considered in
the case of an open economy is equilibrium in the balance of payments.
Within each country, fiscal and monetary policies are used.
15
Further, in one country the government manages its own stock of capital.
Dynamic equilibrium conditions require that the two countries agree on
splitting the burden of fiscal-monetary policy.
As is known, the dis-
tribution of the burden of fiscal policy determines the distribution of
income between the two countries, while the burden of monetary policy
determines the distribution of international reserves.
However, besides
fiscal and monetary policy, the two countries must also negotiate over
the government's investment decisions.
The main results in the case of the open economy with two equal
sized countries are the positive contribution that government investment
programs may make in expanding the world wealth frontier.
This positive
contribution is evidence that international agreements should not be
based only on considerations of balance of payments and government deficits.
The composition of government demand, between consumption and
investment, should also be included.
Even in the small country case, government investment programs
are shown to make possible an increase in the accumulation of capital
without crowding out private investments.
However, this situation
arises only if the government propensity to save is in line with the
target level of capital intensity.
Within an open economy framework, the assignment of fiscal and
monetary policy to guarantee internal and external equilibrium has been
deeply analyzed.
It has been proved for the two-instruments/two-targets
case in which domestic stability and balance of payments equilibrium are
considered, that the economy cannot run its autonomous accumulation path.
16
In fact, in such a situation, the growth path of the system is endogenous.
Direct investment incentives are then suggested as a means to
push the economy toward optimal levels of capital accumulation.
In Chapter IV, we restate the assignment problem for a threeinstruments/three-targets framework.
The targets considered are domes-
tic equilibrium, BOP balance, and the optimal growth path.
The instru-
ments are fiscal policy, monetary policy, and government investment
programs.
The results that we obtain prove the possibility of finding
an optimal control solution for such a situation.
Government invest-
ments can be used to ensure the optimal accumulation process which
allows the economy to run its optimal growth path.
Then, fiscal and
monetary policies are left to meet the targets of domestic and foreign
equilibrium.
Therefore, if the rate of return on private capital does
not lead to the optimal growth path (i.e. it is not socially optimal),
government investments can be called for to fill the gap between actual
and optimal accumulation of capital.
At this stage, the issue of which rate of return is acceptable
for government investment enters the analysis.
In Chapter V, we recall
briefly the recent debate on this issue and we propose some answers.
Part two of our thesis, not directly related to the theoretical
framework of the study, is merely an empirical analysis of the effects
produced by government corporation investments within the Italian economy.
The University of Bologna quarterly model is used to perform
several simulations related to the behavior of government corporation
investments.
A control solution of the model over the last decade
17
is presented.
It is then compared with the results of a model hypothe-
sizing a lack of government corporation investments.
The analysis of
these results follows the major blocks considered in the model:
(a) final demand;
(b) production and employment; (c) government sector;
(d) monetary relations.
Our results show the two sides of any investment decision.
They
are due, from one side, to the demand shock caused by the ordering and
purchasing of investment goods, and, from the other side, to the increase in production capacity which follows the integration of investments into current production.
Italian government corporations have played a relevant role in
sustaining both the demand and the level of economic activity in the
early 1970's.
In fact, during that period, the performance of the
Italian economy would have been much poorer than the historical experience, had there not been any government corporation investment.
How-
ever, once such a relevant flow of investment was put into production,
quite contradictory results were obtained.
From one side, they helped
maintain the level of employment during these years, but from the other
side, the Italian economy experienced higher capital/labor ratios and
lower output/capital ratios.
Therefore, they seem to have pushed the
economy toward greater capital intensity and higher productivity per
man-hour.
At the same time, however, lower levels of average working
hours per year have been experienced.
Clearly, by introducing highly
capital intensive plants, associated with poor level of utilization,
their performance becomes very unsatisfactory.
18
Direct comparisons between these empirical findings and the results we obtained in the theoretical part are not possible.
In both
parts, however, it is clear that government corporate investments can,
in several cases, be an interesting and powerful policy tool.
The
major critical point is that their usefulness is determined by their
internal management efficiency.
The first-best solution is clearly
when government corporations make a positive contribution to the productivity of the system.
If this is not the case, like any other tool
incorrectly used, government corporation investments cease to be a useful tool and become a very limiting constraint.
Unfortunately, the
recent experience of the Italian economy confirms this simple rule.
19
Part One - THEORETICAL ASPECTS OF A MIXED ECONOMY
Chapter I - A TWO SECTOR GROWTH MODEL FOR A MIXED ECONOMY
0.
Introduction
This section deals with stabilization policy implications and
steady-state growth conditions for an economy with government owned
capital operating within a closed economy framework.
The basic structure of the analysis is a two sector growth model
in which government expenditure for investment goods and a government
share of capital stock are introduced.
This analysis covers two chapters:
first, we give a brief pre-
sentation of the model in its static and dynamic versions; second, we
investigate the role of fiscal and monetary policies in stabilizing the
price level and/or its rate of change.
The latter section is principally
concerned with the interactions of a government investment program with
the steady-state conditions of the intensity of private capital and the
rate of inflation.
Simulations are used to outline the possibilities
open to government in the management of the two policy variables we
introduced --
expenditure for investment goods and share of capital stock.
20
1.
The Two Sector Production Model and the Effects of Government Expenditure
Consider a model in which:
I.1)
C= F
1-2)
I
(K, N)
c
c
c
FI(K1 , NI)
=
are the consumption sector and investment sector production functions,
assumed to be homogeneous of first degree, such that in
C= N f (kC
c c
1.4)
I
)
1.3)
NIfI (kI)
=
are the "intensive" production function.
fc and f
Under conditions of pure competition and perfect mobility of factors, the rental rate to capital and the wage rate are given by:
c
Ic
II
k
=
r
1-6)
w=
(k )
f
[f I(k )
k
f' (k
=
)
1.5)
-
k f (k
)]
=
f (k
)
-
k f'(k)
where we consider the price of consumption goods as the "numeraire",
i.e. pc
=
1.
The full employment conditions are:
1.7)
K
1.8)
N
c
c
+ K
+N
=KT
I
= N
I
> k
and assuming that k
1.9)
kck
I.10)
where k
C
N
c
KT
K ' 1
I- (1/N) = Q
,
we can define: 1
T
k
c
(KT-l/N, 1, pk)
I (kTpk)
is the total (private and government) intensity of capital, and
21
<
c
apk
0
DkT
DkT
>
>
0
<
q
0
0
DkT
pk
Consider now, the government owns capital in a certain proportion such
and
KT/N = (K + KG)/N
that:
I.11)
kG =
0 <
kT
k
= K/N
,
therefore:
< 1
is the intensity of government capital.
Hence, the intensity of private capital in the economy is:
1.12)
k = (1 -
) k
We can now define total social wealth as:
1.13)
a
= (k + k ) Pk
and the private wealth as:
1.14)
a = (1 -
)k
+ (m + b) pm
where (m + b) is the government debt (money and bonds).
The government share of the capital stock could be anything entering the production process including human capital and environmental conditions.
However, this investigation is intended to refer explicitly to
government corporations2 producing within a competitive framework together with private enterprises.
As a first approximation, we assume no
difference in production functions between private and public corporations.
Public corporations are assumed to follow the same standard criteria of management efficiency as private enterprises.
levels of activities are determined by the market.
Thus, prices and
The exception and key
point of the analysis concerns the autonomy from private decision-making
22
Fig.I.1
Consumption
goods
Ic
KG
IG
Nc
KG
Investment NG
I
goods
Fig.I.2
C
PPF1
CG
CP
H'
H
P F2
0
P
G
I
23
of government allocation of profits and investments.
This process is
supposedly undertaken within the government budget.
Therefore, we assume government expenditure to be directed in a
constant proportion "h" to investment goods, and in a proportion (1 - h)
to consumption goods.
Then, the flow of goods available for private use will be:
P
T
= qc (k ,pk)
1-15)
C
1-16)
I = qI (kT
k
- (1 - h) e
he
-
k Pk
and I
where C
are in per-capita terms and "e" is per-capita government
expenditure expressed in consumption goods units.
If the government aims to maintain dynamically its own share of
capital stock, the following condition has to be met:
I-14b)
he =
k
pkqI (kT,
Under this constraint, the government propensity to consume (or per-capita
government expenditure) must be derived endogenously.
Figures I.1 and
1.2 illustrate the situation.
The new separating plane H' leads to the reduction in private conG P
sumption and investment given by C C
(1 - h)e = CGC
and
he = IGIP
G P
and I I .
Thus we can define
as per-capita government
consumption and investment.
2.
The Assets Market
The equilibrium conditions in the private assets market are:
1.17) (g/x)pm = L[(kp +gpm);
c
I+q
pk
m ; i+7m
r(pk) /pkk] money market
24
H[(kpk
I.18)(1-1/x)gp
I.19)(l-)kTpk = J[(kpkkgpm
c
I k
7'm;r(pk
c
I k
kk
bonds market
m; r(Pk /k
M
m]
physical
assets market
in which we assume:
> "L
0 >
0
(aL/np )
> 0
m
-
Ta
1 > (aJ/aa)
Z
> 0
0
>
( H/-Bq) < 0
(-DJ/Dp ) < 0
(3J/q) < 0
(3J/3pm) < 0
0
1
1
(.L/pb)
DLpb
(DJ/DP
0
(aL/Dpk
< 0
> 0
(DH/Dpk
<
<
(/0
<
0
0
0
0
where
=i
p
Pk = [r(pk) /pk] + 7k
Pb = i + 7rm
From the equilibrium conditions we can derive two equations for
Pkand i as:
1.20)
-$(y,
k,
i = $ (Y,
k,
pk
I.21)
=
,
r ,
7,
k$ X)
7r
,k' X
and we can set down the following conditions:
( pk/)>
0;
(Dpk/
k) < 0;
(Di/y 3)$0; - (Di/ 3k) > 0;
( pk/9 ) > 0;
( 3i/36
0;
(i/hr
(pk
m ) >< 0;
In particular, the signs of partial derivatives
3i/93
can be verified graphically.
Two cases are met.
< 0;
(pk/x)
(1/x)
pk/
< 0
> 0
and
See Figure 3.
First, an uncompensated nationalization (i.e.
25
Fig. I. 3
kk
......
-
m
0
00
i 2
12
.l
10
l'
ii
26
Fig.I.4
a a
a a
0
a2a
PM
a 2a
2Aa
+
if
tS +,
g
k
t
X+
'
fa
a
27
an increase in
) leads to excess demand for capital goods since
J/aa < 1, and the physical assets market clearing equation, kk, has to
shift right to some k1k
Due to the wealth effect, there will be an
excess supply in the money market, and the interest rate will have to be
lowered to obtain the clearing condition given by m1 m .
tion, the price of capital will increase.
In this situa-
To examine the movement of the
rate of interest, we should measure two wealth effects in both consumption and money market demands.
Indeed, we could get either an increase
.
or a decrease in the rate of interest, as given by
mim1 and m 2 m 2
Second, if we assume the government proceeds with nationalization
(i.e. increasing
S),
financing it by issuing bonds, then an increase in
the rate of interest in the bond market matches the decrease due to the
money market, such that both Pk and i will move to a higher equilibrium
level, as in the case of i
If the two effects on the interest rate eli-
minate one another, the money market clearing equation will not move and
a new equilibrium will be reached at increased i and Pk.
government capital is financed by bonds, the sign of Di/iI
If the increased
is definitely
positive.
In general, in the space pkm , the assets market equilibrium condition will lead to an upward sloping aa curve, as in Figure 4.
3.
The Consumption Goods Market
The supply of consumption goods available for private use is:
1.22)
qc(k
k
- (1 - h)e
where:
(1 - h) =
cG
- propensity to consume out of government expenditure
28
h
-
e
propensity to invest out of government expenditure
=
-
The demand side of the market is expressed by:
I.23)Cd {[(1
)kT pk+gpm]; [q(kT'pk) + (d+Trg)p
- e + Tkpkk]}
where we assume that private consumption is positively related to private
Thus, for any given total wealth, private consumption is nega-
wealth.
tively related to net government wealth,
(i.e. government capital minus
debt).3
Then we have:
C(a, Y)
=
Cd
where
a
=
Y
private wealth
=
private income
and
(DC/@a)
0 < (DC/DY)
> 0
< 1
The income component of private consumption demand can be derived
from the following government and private identities:
-
Government Budget Identity
T + rk
where:
-
G
+ p d
m
=
bpp
+ e
b m
T
=
taxes per-capita
rk
=
profits from government assets
pmd
=
government borrowing
PbPm
=
interest payments on government debt
Private Budget Identity
rk + w - T + bp
n
=
q(k T, pk) + dp
- e
29
Fig.I.5
ss
s0 s 0
d d
00
PM
Pmo
".,Odd
~ml
C
30
Fig.I.6
cc
31
Then, the market clearing condition is:
I.24)qC(k T'k) -
(1-h)e= Cd
[ 1-3)k Tpk+gp
; q(kT 'k)
+ (d+7mrg)p
e
-
+ fkpkk]
which is presented in Figure 5 and Figure 6 for the case in which the
income effect is positive either because of a positive expected rate of
deflation or because of a government deficit, d, higher than the inflation tax,
Mg.
We are now in a position to define the consumption market equilibrium as a "cc" curve in the pk'
m space.
of consumption goods decreases, and S0 S
As pk increases, the supply
shifts leftwards to S S
.
On
the demand side, both wealth and income effects are positive, and d d
shifts to d1 d
Thus, the level of equilibrium of the price of money pM
is lowered, and CC is downward sloping as in Figure 6.4
To test the effects of policy decisions within the consumption
goods market, two simulations will be performed and presented in the
following sections.
We consider, first, an increase in government expend-
iture covered by taxes; and second, an increase in the government share
of capital through nationalization.
3.1
Effects of a balanced budget increase in government expenditure
In this section we aim to analyze the effects produced by a balanced budget increase in government expenditure within the consumption
goods market.
Two kinds of effects are produced in such a situation.
32
Fig. 1.7
Cc
cc
0
C2C2
0
1
33
First, the increased government expenditure will be directed to consumption and investment goods according to the specific government propensity
to consume and to invest.
Therefore, the supply of consumption goods
available for private use will decrease by
[(1 - h)Ae].
Second, if
government raises taxes by an amount equal to the increase in expenditure,
Ae, private disposable income will be decreased by that amount.
Thus,
the private demand for consumption goods will decrease according to private propensity to consume.
By combining these effects, we reach either
a situation of excess demand, one of excess supply, or one of equilibrium.
In the first two cases, to move the market back into equilibrium, an upward or downward movement of the CC schedule will be needed.
Thus, a balanced budget increase in "e" will result in:
- an increase in pk
if
(1 - h) < (1 - s)
+
C C
-
if
(1 - h) > (1 - s)
+
C2 C2
if
(1 - h) = (1 - s)
+
CC
a decrease in pk
- no effect at all
as shown in fig. 7.
3.2
Effects of an increase of the government capital stock
An increase in the government capital stock, i.e. an increase in
S
through an uncompensated nationalization of private corporations, will
decrease the amount of private wealth.
Hence, the private demand for
consumption goods will also decrease.
If the government propensity to
consume does not change, an excess supply of consumption goods will be
registered, and the relation CC will shift upward to clear the market
(See Figure 1.8, relation C1 C 1 ).
However, as we shall see later, if the government wants to maintain in the long run its higher share of capital stock, it has to
34
Fig.I.8
c0 c0
cc
35
increase its propensity to invest according to the relation (I.14b).
Thus, a lower government propensity to consume will make available a
greater flow of consumption for private use.
simulation is unclear.
The final effect of this
In fact, it will depend on the increase of the
government propensity to invest (h) and on the size of the nationalization, producing a negative wealth effect on private demand for consumption.
An important relation can, however, be noted:
the effects of
nationalization should always be considered in the light of government
budget policies and the composition of government expenditures for consumption and investment goods.
4.
The Complete Model - Statics
Drawing on our previous analysis, we can now set out the following
model:
(Y, k,
T,m'
$ (Y, k,
, fm'
Pk=
i
=
qC(kT,9k) -
(1-h)e
rk2 X)
7k
=
X)
Cd [(l- )kTpk gp m
Ipk+qc) + (d+Trmg)
- e + fk pkk]
where, in Cd, the first argument is private wealth and the second argument is private disposable income which follows from the private income
constraint.
This model can be represented in the pk' pm space by the assets
market clearing relation "aa" and the consumption market equilibrium
condition, CC.
36
We will now examine the static performance of the model by experiments concerned with parametrical movements in the government propensity to save and in its share of capital stock.
Four.simulations have been considered.
The first simulation is
related to the one on the balanced budget increase in government expenditure which has already been examined within the consumption goods market.
When the full model is used, the effects of an increase in government expenditure, fully financed by taxes, are still dependent on the conditions
given by the government propensity to consume compared with the private
propensity to consume.
The second simulation considers the effects of a sudden variation
in the capital stock on both the consumption goods market and the assets
market.
The results that we obtain are not clear.
Therefore, several solu-
on the differential impact of wealth and income.
tions are possible.
They appear to depend
The last two simulations deal with the particular
Both the effects of a
tools that we have considered in our analysis.
nationalization and of differing compositions of government expenditures
between consumption and investment are analyzed.
4.1
Fiscal policy actions
An increase in government expenditure, fully financed by taxes,
affects only the consumption goods market.
The supply of consumption
goods available for private use decreases by
demand decreases by
[(1 - s)Ae].
[(1 - h)Ae]
and their
Thus, the net result on Pk and pm
depends on the relative dimension of the government propensity to consume
and the private propensity to save out of income.
37
Fig.I.9
aa
kl
I
pko
C C
Pk2'
C 2 c2
I
I
Pm2
I
.1
mMO
Pml
PM
38
As can be verified in Figure 1.9, if:
increase
(1 - h) < (1 - s)
Pk and p
b)
(1 - h) > (1 - s)
Pk and pm decrease
c)
(1 - h) = (1 - s)
Pk and pm unchanged+-
+
+
a)
C2 C2
0C0
Thus, the increase in government expenditure "e" will be inflationary or deflationary according to whether the government propensity to
consume exceeds or falls short of the private propensity to consume.5
An increase in the stock of capital
4.2
An increase in the stock of capital, k , affects both assets and
the consumption goods markets.
For the sake of simplicity, we assume a
constant share of government capital.
An increase in the intensity of the capital stock enters the CC
schedule in three different ways:6
> k
k
c
-
T , given
increases the supply of consumption goods, q , by
I
increases the demand through the wealth effect by
Ccd
d
3q
~a
(
-
3kT
DCd
-
increases the demand through the
income effect by
Dq
kT
The assets market relation is also affected in three ways:
-
by an increased supply of capital goods, (1 -
-
by an increase of demand due to the wealth effect
-
by a decrease of demand due to the income effect
)pk
3J Ba
j
T
Di j-kT
q Dk T
39
Fig.I.10
a a
a a
0
a a
ko
C C
CCc
Pml
PMO
40
Figure 10 sums up this experiment.
As can be seen, different solutions of pk m result, depending on
the shifts of the aa and CC curves.
Note that if pk does not move, the
new equilibrium implies a decrease in pm, from p mo to pml*
In this case, the aa schedule has to shift to a1 a, and the cc to
c 2 c , thus:
T
3J
k
Ba
+
aT 3kT
-J3q
Dq DkT
@q
3cd Da
c <
wealth effect
income effect
(positive)
(negative)
-
Da
DkT
acd Dq
+
2
Tq
kT
DkT
Again, the final result depends on a combination of wealth and income
effects in the two markets considered.
4.3
Effects of an increase in the share of government capital
For any given stock of capital, a sudden increase in the stock of
government capital affects both the assets and consumption markets.
leads to a condition of
In the latter market, an increase in
excess supply.
This is due to the wealth effect.
Then, for the market
to be in equilibrium, CC has to shift upward to C1 C
market, an increase in
In the former
leads to an excess demand of capital.
tion, the aa schedule shifts upward to a1a .6
In addi-
Thus, pk increases and pm
can either increase or decrease, as shown in Figure I.11.
4.4
The role of the government propensity to consume
An increase in the government propensity to consume, (1 - h),
affects only the consumption goods market and leads it to a situation of
excess demand.
Thus, CC shifts downward.
Both the price of capital and
41
Fig.I-l 1
Pk
-
2a
a a
C C
Pkmo
cc
~~m0
0
42
Fig.I.12
pk
aa
pko
Pkl
C C
ml
mO
43
See Figure 1.12.
of money will decrease.
5.
The Complete Model - Dynamics
As the population grows, both the stock of capital and the govern-
ment debt have to increase to maintain their per- capita values constant
and to keep the whole economy growing at a positive equilibrium rate.
We can now define the relations:
k = q1 (kT
1.24)
k)
-
-
- nk
=d - ng
1.25)
Then, if the economy is to maintain the given per capita level of
private capital, the following condition has to hold:
T
he
qI(k , pk) = h
+ nk
Pk
Further, we can consider that the government determines its own
propensity to invest such that either its share of the capital stock or
the per capita intensity of government capital remains constant.
Thus,
using (I.14b) and (1.24), we define
1.26)
*G = SqI(kTT
1.27)
k
=
(1
S)
-
(since *T
k) - nkG
=
qI(k , p
I (kT,
k)
-
nk
nkT
from which we can express two different targets/constraints that the government may want to pursue:
a)
kG = 0, to maintain a given per capita intensity of government
capital
44
8
b)
= constant, to keep constant its share of capital
Stock and/or flow equilibrium conditions
5.1
Consider the general condition of equilibrium:
I.28)
+
G
pk + N
'
-d
K
d
T
q(k , Pk) + zPm = C
m
where z is the net transfer variable, N is the population, and the superscript d is for demand.
Now, we know that:
i T
S
qe + p k
q =q c +P kq,I
NN
Then, since
where the subscript s is for supply.
apm = dpm - e = dp
- he -
(1 - h)e
we obtain:
K
1.29)
s
q+
+ dpm -
d
(1-h)e - he = C
+
-d
K
p
G'd
+ N
Now, if the consumption market clears:
q
-
(1 - h)e = Cd
and, if the government equilibrium condition holds:
he = pk qI(kT,
we then have
kT
K IN
s
-
k
G
K /N = K/N
,
and we can express the private
sector condition as:
1.30)
k
-s
K
N
'd
K
N
In general, we can say that:
Gd
p
(G -d)
45
if
then
he > pk
N
I(kT'
k
< K
and substituting
K
K
N
Pk
-
p (d /N - d)
N
<
0
+
excess demand for private
capital
m(adIN - d)
<
0
+
excess demand for govern-
ment debt
Finally, given the clearing condition of the consumption market, we have:
S
=
I
if
he
=
pk
I(kT
k
S
<
I
if
he
<
pk
I(kT,
k
S
>
I
if
he
>
pk
I(kT'
k
Clearly, the two inequalities hold in an ex-ante situation.
As in any
standard Keynesian system, the savings/investment identity always holds
ex-post by further income adjustments.
In this framework, however,
equilibrium can also be reached by government behavior.
As we shall see
in Section II.1, the government propensity to save can become endogenously determined such that an equilibrium condition will be assured.
46
Chapter II - ISSUES IN PRICE STABILIZATION AND GOVERNMENT INVESTMENT
PROGRAMS
This section of the analysis investigates the performance of the
model through three different approaches:
(a) government using monetary
policy to stabilize the price of money, pm; (b) government using fiscal
policy to stabilize the price of money, pm; and (c) government using
fiscal and monetary policy to stabilize the rate of change
of prices, 7rm
With each approach where only one policy instrument is used, the
others are assumed to operate "neutrally", meaning that the size of their
variables is kept constant in per capita terms.
1.
Monetary Policy
When the government uses open market operations to maintain the
price of money, p , constant at some level, p*, the complete model is:
M
m
e ,x)
T
= qI(kT
k)
II.1)(a)
k
II.1)(b)
kG = (he/pk)
II.l)(c)
k
=
11.2)
g
= d - ng
11.3)
Pk =
11.4)
i
II.5)
T
=
-
-
he
-
nk
nkG
*G
k + k
$(y,
k T,
,
Tk' Tm' x)
T
$ (y, k ,
,
m
c (kT, pk
-
(l-h)e
=
Cd [(1-.S)k pk + gpm; q kT, pk
47
Mg)p+ e +
11.6) ff
=
kpkk]
*
+ (d + Tr
11.9) e
11.7) itk
0
II.10) d
e
=
=
=
d
11.8)
pm
II.11)
ki
M
=
k + kG
which is a system of twelve equations with thirteen unknowns:
h, kT , kG , k-, g, p'M9 k' ' "fm' fk,3 d, e, x
the model would be to specify kG as a function of time.
One way to close
However, we prefer to follow an alternative line.
We assume the government wants one of two things:
-
either to maintain a constant share of capital,
11.12)
=
he
pkPqI(kT
3.
Therefore:
k
which can be substituted in the first equation:
k
=
II.lb) kG
=
II.la)
-
(1
-
6) q 1 (kT
k)
-
nk
k) - nkG
q1 (kTp
or to maintain a constant per capita intensity of capital, kG
Therefore, from II.lb, we get:
11.12')
he/pk
=
nkG
In both cases, either the government propensity to save or the share of
capital,
, become endogenous variables.
Then, the previous set of rela-
tions forms a complete model describing the growth path of the economy
under monetary policy stabilization.
48
1.1
Static Analysis
When monetary policy is used to stabilize the price of money, the
assets and the consumption market clearing equations can be described in
the debt/money ratio, x, and price of capital, Pk, space.
presses.an inverse relation between x and Pk.
The former ex-
The latter, unaffected by
monetary policyis represented by a line vertical to the Pk axis, see
Figure II.l.
Within this static framework three different simulations are performed:
an international transfer which increases the stock of physical
assets, a nationalization which increases the government stock of capital,
and an increase in the government propensity to invest.
1.1.1.
Effects of an increase in the total stock of capital
An increase in the stock of capital (an international
transfer, for instance) affects the assets and the consumption goods
market clearing equations in several ways.
The CC schedule can shift right, left, or not at all, depending on
.
On the supply side, this effect goes
through the production function.
On the demand side, it works through
the effect of an increase in k
the wealth and income effect.
As described in Figure 11.2, we have the following results:
if
T
d
T
d
q c/ak = (DC /3a)(Da/Dk ) + (C d/q)(9q/Dk
- C C
1(1
if
T
d
T
d
3q /3k > (DC /3a)(a/Dk ) + (3C /3q)(3q/k
c
(excess supply at C0 CQ)
)
)
- C C
49
Fig.II.1
2Ca
a
50
Fig.II.2
x
C2 2
C3C3
00
cc
*1
KK
x
a a
0 0
Pk2
9
v
k3
Pko
a 1a 1
Pkl
ob
- C 2 C2 , C3 C3
aqc/k < (DC d/a)(Da/k T) + (C d/3q)(Dq/Dk
if
)
51
(excess demand at C C0)
If the demand function is linear with respect to income, then
Cd
DClda/q
=
(1l-s).
The capital market is affected on the supply side by the effect on
the term [(1 -
)k ] and on the demand side by a positive wealth effect
and a negative income effect.
demand for money.
The latter expresses the transaction
Thus, we have:
if
(1 - 6)
=
T
T
T
T
(3J/Dq)(3q/Dk ) + (3J/a )( a /Dk
- a1 a1
if
(1 - S)
>
(3J/3q)(Dq/3kT) + (3J/aT)
- a2 a 2
if
(1 - S)
<
(3J/3q)(aq/3kT) + (DJ/3a )(aa /kT)
)
- a a
aT/ k)
The open market operation to be performed by the government depends for both amount and sign (purchase or sale) on the combination of
all the above listed effects.
We will here outline only the case de-
scribed by the C3 C3 and a1 a1 schedules.
In that situation, no open market
operation has to be performed because the system immediately reaches a
new equilibrium position with a lower price of capital, Pk'
1.1.2.
Effects of an increase of the share of government capital
stock
An increase in the government share of capital,
, affects
the assets market clearing equation and produces an excess demand for
The new equilibrium condition is then found at the higher a a
1 1
,
capital.
as shown in Figure 11.3.
52
Fig.II.
3
x
cc
x 0 =x 2
x
j22
,<
.
x '.
I
p
-
x4
c3 3
c
C
3
E
Pko
I
kl
k2
Pk3
53
Fig.II.4
x
0
aa
6
Pkl
~kl
U
~ko
Pko
54
If we exclude wealth from the consumption demand function, the cc
schedule does not move.
market sale.
Thus, the government has to perform an open
On the other hand, in the case in which we include private
wealth, the consumption clearing equation shifts to the right.
Indeed,
at the old C0C0, there would be an excess supply of consumption goods.
A rightward movement of cc, given the a1 a
schedule, can lead to a situ-
ation in which the government does not have to perform any open market
operations, x0=x 2, because the system reaches a new equilibrium simply
by increasing the price of capital
to Pk2'
Last, if the wealth effect on consumption demand is sufficiently
strong, there could even be an open market purchase,
as in the C3 C 3 -a1 a
case.
1.1.3.
An increase in the government propensity to consume
Under the hypothesis of an increase in the government
propensity to consume, no effect on the assets market clearing equation
will result.
Instead, in the consumption goods market there will be a
situation of excess demand.
capital, pk, has to decrease.
Then, to clear the market, the price of
The government has to perform an open
market sale, as in Figure 11.4, and the debt/money ratio increases
to x
.
x
from
1.2
Dynamic Analysis
From the system we have investigated in the previous section, we
can define in the Pk, kT space the following dynamic relation:
55
kT
=
q
k
=
q
-nkT
- nk
-(he/kk)
+ (nkG
-
=
qI - nkT
(he/pk) + nk
k
=
he/pk)
which, taking into account condition 11.12, becomes:
or:
k
=
q-
k
=
k
Then, if
1qI - n(l
- S)k
=
(qI - nkT)(l
(1
if condition 11.12' holds.
the government owns a positive share of capital and aims
to maintain it dynamically, we have k < kT > 0
kT = 0 = k.
and
Hence,
in the Pk, k plane, the k = 0 schedule indicates these equilibrium conditions.
Further, if the government target is to maintain a given level
of per capita government capital intensity, kG = KG IN, then the government share of capital,
1, will tend either to zero or to one, depending
on whether kT is positive or negative, i.e. if the rate of growth of
population is smaller or greater than the rate of capital accumulation.
Only if these rates are equal, can 3 be kept constant in a growth situation.
Then, we can verify the slope of the
k
=
0
schedule.
As shown
in 11.13, it is represented by an upward sloping function, since:
(-)
T
T
(3qI/3k ) (Ok/3k)
11.13)
(apk/ak)
.
Frh e
=
-
n
>
-
pk)
f(mtep
(+)
Furthermore, from the consumption
+
0
he/pk2
(+)
market clearing equation we have:
-1
56
Fig.1I.5
cc
57
kT
Cd
(.-)e
(d
q(.T
c-
-
P)k+ gpm; q
(kT
k
),pk
+ 4+
mg) P
e + TrkPkk ]
The slope of this relation is given by:
-
(pk/
CC
-(3q
/aP)
+
(C
d/a)(a/9pk)
(Cd
/aq)(3q/3pk
+ (a d/aa)(a/akT )(3k /k)
(3qc/3kT )(kT/k)
)
+
T)(k /3k)
(d/aq)(3/
(*)
which is positive for:
TTd
T
Td/
(aqc/akT) (akT/k) ( (3C, /aa) (a/akT) (3k /3k)
T
T/
+ (0Cd/q)aq/kT)(3k Tk)
Let us now assume the signs of the second derivatives to be such
that a steady-state solution is possible.
We can plot the
k = 0
and cc
schedules as in Figure 11.5, where pk* and k* are the stable steady state
conditions.
figure.)
(We exclude here the small area at the bottom of the
Since we also assume the government has priority in purchasing
goods on the market, we can refer to the private equilibrium condition.
Total capital intensity follows from 11.12.
Dotted lines represent
the usual limits of specialization into one of the two goods.
1.2.1.
Effects of an increase in the government propensity to
consume
As the government increases its propensity to consume, the
schedule,
k
=
0,
shifts rightward to
(i = O)l,
see Figure 11.6,
and
58
Fig.II.6
cc
KO
(CC)C
pIX 2
Ic
59
cc shifts to (cc)
The condition under which
k
=
0 shifts more than
cc can be proved as follows:
-
*.
at k
on the (k =
0
)1,
Pk is decreased to pk2, and if the
*
increase in the production of consumption goods is greater
than the increase in government consumption, at k
,
cc has
.
to be in excess supply, hence (cc) has to be above
1
(k=O) 1
Under this hypothesis, the steady-state private capital intensity
.
increases to k
On the other hand, the price of capital can either increase or
decrease depending on the two combined effects.
Such a result is reinforced by the government constraint 11.12,
where a decrease in
h
has to be followed by a decrease in
, i.e. an
increase in private wealth.
Consider now the constraint given by government targets.
policy of constant
Under a
, since the government propensity to invest, h, is
decreased, the price of capital, pk, must also decrease to maintain the
condition:
he/pk
=
q,
Hence, if the solution of the system gives a lower price of capital goods
such that the previous condition holds, no operation will be needed.
Otherwise, and more likely, the government will have to perform open
market purchases or sales to reach a level of Pk' leading to an equilibrium position both in assets and consumption goods market and satisfying the constraint at a lowered government propensity to save.
Such
operations will be needed even under a policy of constant per capita
intensity of government capital, i.e. when
kG = 0.
60
1.2.2.
Effects of an increase in the share of government capital
stock
The increase in
, the share of capital stock owned by the
government, has to be analyzed for two different cases.
In the first case, the government performs a nationalization and
Its propensity to
announces no changes in its expenditure function.
invest remains invariate in the long-run.1
If we do not consider any
wealth effect, the two schedules do not move.
We have a sudden jump to
k., and in the long-run, the economy will return to the starting situation.
(See Figure 11.7).
We now consider the wealth effect on the consumption clearing
equation.
Along the old C C , there is an excess supply, and the new
0 0
C C is above C C
00o
1 1
.
The price of capital increases to the point, C, and
in the long-run both Pk and k increase.
In the second case, the government performs a nationalization,
increasing
, and announces an increase in its marginal propensity to
invest in order to maintain the higher
in the future.
As plotted in
Figure 11.8, even with no wealth effect, the consumption goods market
.
shows excess supply and the cc schedule shifts upward to C C
If we consider the wealth effect, cc shifts further upward.
given the shift in cc, let us detail the behavior of i
At the corresponding point on C C , we can have
0 0
i
<
0
= 0.
Now,
Take k*.
depending on the
combination of the effect due to the increased share of government
capital,
, and the increased government propensity to invest, h.
Given k* and an increased
a higher (1-h).
T
, we have a higher k , a higher Pk and
Thus, we have two opposite effects in the production
-.
s
.
-
,
.
-s
.
.
-
.
-
i ||1I||[10
II
--
|||
.
-
61
figj~.'1
Cl C
CCO
A
fl0
I
k
k*0
mqI
I2
62
Fig. II.8
- =O(
A
-
kOi
cc
-
p*
..
ko
k* ki
k
63
-
of capital goods:
< 0,
and
> 0
akTap
*
k
Hence, at k
on C C
we may have:
o
(a)
qo
k > 0, provided
k
ap k
is large enough to outweigh the decrease
in investment production due to the higher kT and to the variation in the
government demand for investment
he/pk, which in turn results from the
higher government intensity to invest, h, and the higher price of capital,
Pk*
Under this hypothesis the new
k
=
0 will be some (k
=
0)1, and
.
the steady state intensity of private capital
increases to k
(b)
k < 0, provided the effect of a higher price of capital is
outweighed by the higher kT and by the new value (he/pk).
schedule shifts to (k
decreases to k
=
0)
i = 0
The
and the long-run intensity of private capital
0
In both cases, the price of capital increases. 8
A very peculiar situation could result if the wealth effect due to
the increase in
on the private demand for consumption goods were so
strong as to outweigh any other effect.
That is the case of C1 C
in
which both the price of capital and the private capital intensity
increase in their steady state values.
2.
Fiscal Policy
We now assume that the government changes its deficit through
variations in taxes in order to maintain constant the price of money, pm.
64
Under this situation, the complete model is:
II.10) k
0
= qI(kT, Pk) - he/pk - nk
OG = (he/pk)
-
(a)
nkG
(b)
11.1)
g
11.30)
)
x
T'm, TTrk
= $:(y, k,
,Tr m'
qc (kT, pk) -
11.6 0) Tr
11.90)
ng
(y, kT
Pk =
11.40) i
11.50
= d -
(1-h)e
= 0
11.70)
11.100)
e = e*
k9 X)
Cd [(1 -
=
)k pk + gpM; q (kT'
+
(d + 7mg)Pm -
rk
=
7
k)
e + Tr kkpk I
0
II.80)
x =x*
11.110)
m
=
k + kG = kT
As before, we assume:
11.120)
(he)/pk
=
qI (kT, pk
The system is again defined by thirteen equations with thirteen
unknowns, which describe the growth path of the economy under price
stabilization through fiscal policy.
A "neutral" monetary policy refers
to a policy in which values of monetary variables are maintained constant.
2.1
Static Analysis
For the sake of simplicity, let us consider an easy workable
function for the private demand for consumption goods, such as:
65
Fig.II.9
A
4-
Ic
66
Cd
C)d [ (
=
-
)kTk + gp.] + (1 - s)[q(k T'k) + (d + TIg)p. - e]
Then the market clearing condition becomes:
qC(kT,
k) -(l
- h)e
=
Cd [(1
+ (d +
T)kT
k + gpm] + (1 - s)[q(kT
m
g)p
m
k
- e]
which can be solved with respect to "d"
sqc(kT, pk) + (h - s)e (1 -
a
where:
Furthermore,
=
(1 -
T
)kTk + gpm
=
(1 - s)qI(kT, p k
- C (a)
S)p
private wealth
the slope of 11.15 in the d,pk space is:
k
0
CC
The assets market clearing equation is not affected by government deficit. 9
Thus, we can plot the cc and the aa
schedules as shown in Figure
11.9.
Again, we present the results of three simulations.
First, we
consider an increase in the government propensity to consume for any
given level of government expenditure.
Second, we take the government
propensity as a constant, and we analyse the effects due to an increase
in government expenditure.
Third, the impact of a nationalization will
be investigated.
2.1.1.
Effects of an increase in the government propensity to
consume
As shown in Figure II.10, a decrease in the government
67
Fig. 10
d00ng
00cl
6
.9
68
Fig.II.11
aa
I
92
C2C2
oco
I
I
dClC.
4
69
propensity to invest, h, does not affect the assets market clearing relation aa.
In the consumption goods market, a higher government propensity
to consume leads to a situation of excess demand.
has to be lowered to C1 C.
and
[
d
2.1.2.
- ng]
Hence, the cc schedule
The government has to run a lower deficit,
will be negative.
Effects of an increase in government expenditure
An increase in government expenditure brings no change
to the asset market relation a a .
On the other hand, the consumption
goods schedule C0 C0 is affected according to the difference between public and private propensity to consume.
In Figure II.11, we plot the
different situations, in which we have:
a)
C1 C 1
if
(1 - h) < (1 - s)
+
g
b)
C2 2
if
(1 - h) > (1 - s)
+
g2 = (d2 - ng) > 0
c)
C C
if
(1 - h) = (1 - s)
+
g
2.1.3.
= (d
- ng) < 0
= (d0 - ng) = 0
Effects of an increase in the share of government owned
capital
The static effect of a higher share of government owned
capital determines an excess demand for capital in the assets market, and
an excess supply of consumption goods.
To clear the two markets, the
price of capital, pk, has to increase.
See Figure 11.12.
The new equilibrium condition implies a higher Pk and either a
lower or higher deficit.
An interesting case could be the one given in
i
70
Fig.II.12
1t
al=ng
1
I
Oco0
____*
I
Thc
71
Figure 11.12 in which the deficit does not move.
The equilibrium con-
dition is reached with a higher price of capital, Pkl'
Dynamic Analysis
2.2.
Under price stabilization obtained through fiscal policy we may
refer to the following dynamic relations:
i = qI(kT,
k) -
(he)/pk - nk
=
g
d - ng
As before, we assume condition 11.12 still holds such that we can
have either:
k
(1 -
=
)qI(kT
k) - nk
or:
kG
qI(kT 3Pk) - nkG
=
In the government debt relation we can substitute "d" by (11.15),
and obtain:
sqc(k T, Pk
11.16)
j
+ (h-s)e
(1-s)qI(kT, pkk
-
- Cd (a)
-
=
ng
(1 -s)pm
We can prove that in the space g,k, the
k = 0
schedule is upward
sloping since:
(-)
(-)
q I DkT
k Dk
+ 'pI
k DkTk
DkT Dk
11.17)
Ik k=0
+ (1-h)e 9k DkT
AT @k
+ k.
n
>
=
(Dq I@pk (k/+g)
(+)
+ [((-h)e/pk
)k
(+)
0
72
The g = 0 may be either upward or downward sloping, since
g0
k
11.18)
3qI 3kT
DqI 3pk akT
-- +)-(-s)[(
{s(k
3k
T3k
3q1 3kT
3k
1
Dq c. pk
{s(ap
k ag
k
k +
9pk 3k
3k -k
SI}
T
-
~~~aC Dq
_O3G
k
[aI
) - (1-s
k
<
ap
DqI 3p k 3kT
k
I
g g q]
3C d 9a
a }
0
R
where:
=
ak
Thus, we must make the following assumptions:
-
the wealth and income effect, due to an increase in g, on the
price of capital, Pk, are in the same direction, such that
(Dpk/(g)
-
is negative
the wealth effect with respect to k in the numer-
either:
ator of (1.33) is smaller than all the other effects, and the
wealth effect due to "g" in the denominator of (1.33) is
smaller than the other effects, i.e.:
S
Dk
g=0
(+)
(+)
>
0
Ik
73
Fig.II.13
<
0
(
g
-
3'
Ics
k
74
-
or
both the wealth effects with respect to k and g are strong
enough to outweigh the other effects in the numerator and in the denominator of (1.33), i.e.:
(~
3k
(-)
>
0
g=0
Then, we can plot in Figure 11.13, the schedule
2.2.1.
g=0
as upward sloping.
The effects of an increase of the government propensity
to consume
If the government increases its propensity to consume both
k=0
and
g=0
will be affected.
Indeed, at the previous
g=0 , a posi-
tive rate of change in government debt will result and the new
will shift upward.
Along
i=0 ,
k
is positive,
and the curve will shift rightward to
(1-h)e
(=0)
is decreased,
(i=O) , as shown in Figure 11.14.
Thus, the system will have a higher steady state private intensity of
capital and a higher stock of government debt.
2.2.2.
A balanced increase in government expenditure and propensity to consume with a constant flow of government investment
Consider now that the government increases its total ex-
penditure without increasing its demand for investment goods, i.e. an
increase in
constant.
e
and a decrease in
If this is the case,
h
cause
the quantity (he) to remain
i=0 does not move.
schedule we have the term (h-s)e, at the old
g=O,
Since,
in the
g=O
A>Q, then the curve
75
Fig.II.14
9
gAo)
k=_
91
~
k= 0.
k0
76
will shift to the (g=O)
See Figure 11.15.
.
0
Both the intensity of
private capital and the stock of government debt will increase in the
steady state conditions.
2.2.3.
An increase in the share of government owned capital
The effects of an increase in the share of government
capital,
, under price stabilization through fiscal policy will be
analyzed using two different hypotheses.
In the first case, the government performs a nationalization increasing
, but does not adjust its
quired equilibrium.
capital, pk.
Both
and g=0 are affected through the price of
In (1.24) an increase in
and in the old schedule
old.
k=O
propensity to save to the new re-
i>O
.
leads to an increase in pk'
The new (k=O)
In (11.16) an increase in Pk makes
is to the right of the
g<O and the relative schedule
shifts rightward, as in Figure 11.16.
The shift rightward on the
g=0
schedule can lead to
(g=O)
0
or
(g=O)1
capital.
point,
,
i.e. it can lead to a higher or lower intensity of private
Consider the point on
corresponding to k*.
At that
the intensity of private capital is the same as in the initial
situation, but as 3 is higher, k
in
(k=O)
is also higher.
Further, the increase
1 has caused an increase in Pk such that the value of A depends on
these results as well as on the lower g.
q
q
+
-
Indeed, in (1.31) we have:
increasing by
(q
/DkT)
and decreasing by
(3q/DkT)
decreasing by
(3qC/kT)
and increasing by
(9qckaPk)
77
Fig.II.15
k=O
gg
g*
1k*
kk
78
Fig.II.16
k=O
gg
9I
(=0)
79
Pk+
increased
a
increasing with Pk, even if k* is not changed
g
decreased
+
Thus, we have:
g >
either:
(g = 0)
+
if
j(aq c/DkT)
>
(
k)
and
((I/pk)| >
I(3/k
1
T)
and the net difference between the two, if negative, is outweighed by the decrease in g;
or:
< 0
+
(g = 0)1
if the effect of the increase in pk is strong enough to outweigh
the effect of the increase in k
on the production of investment
goods, and the related increases in pk and in qI outweigh the
effects on qc and g.
(11.16) makes
(g=)0
In any case, the inclusion of wealth in
more likely.
In an extreme case, the wealth effect could outweigh any other effect
such that g has to
shift upward to (g=0)2 .
The steady state intensity
of private capital will then increase further.
possibility of government increasing
The second case is the
and adjusting h to maintain the
higher share of capital in the long run.
The net effect on the k schedule depends on the increase in the
production of investment goods caused by the increase in Pk and by the
effect on the term (he) of an increased h.
can have:
As shown in Figure 11.17, we
80
Fig.II.17
g
0}
*0
111
ko
'k
81
(k=O)
if the production of investment goods increases more
than the net increase in (he)Ipk due to both h
and Pk;
(k=O)1
if the other case holds.
If the wealth effect is excluded, on the g we have a decrease in
qc and an increase in q
due to the higher Pk.
(h-s)e does not outweigh the previous effect,
to (g=O) 0
Then, if the increase in
g<O , and shifts downward
The steady state intensity of private capital either in-
creases to k
or decreases to k
The effect on g is uncertain.
Finally, to consider the wealth effect on (11.16) we should refer
to the decrease of private wealth, due to the higher 3, and to its increase due to the higher Pk
Even in this case, the new steady state
solution for the intensity of privately owned capital and government
debt is uncertain.
3.
Perfectly Anticipated Inflation and Government Investment
Programs
In the previous sections, we tested the performance of the model
for price stabilization through monetary and fiscal policy.
We turn now
to consider policies stabilizing the rate of change of price, u
m
.
We
will also test the interactions between government investment programs
and the steady state conditions of the intensity of private capital and
the rate of inflation.
The complete model is:
II.l*)
k
11.1*)
*G
k
=
T
q1 (k
kG
qI (k
k
-
-k
(he)/pk - nk
(a)
nk
(b)
82
where we assume;
II.12)
(he) /Pk
I (k , pk)
Furthermore:
= d - ng
11.2*)
g
11.3*)
Pk =
11.4*)
i
11.5*)
q (kT' Pk) - (1-h)e = Cd{[ (1-)kTpk + gpM]} + (1-s)
(y, k,
= $(y,
k,
, 7rm, Irk' x)
,
Trk' X)
m
[q(kTp k) + y + ny - e]
11.6*)
Ir
= Tr *
m
m
11.8*)
ILL
11.7*)
If
k
= 0
ee
p19)
11
and according to the policy used:
either:
II.10*)
d = d*
II.10*bis)
or:
x = x*
We have to point out the substitution:
(d + 7 g)pm =y + ny
in the equation (11.5*), which can now be solved for y
11.19)
m,,
y = 1/(1-s){qc[kT, 4(y, kT,
q(k,
(k, y,
,
7r
x)]
, x)]
-
-Cd
(h-s)e
-
[(1-s)
(a) - ny}
Thus, through (II.1*) and (11.19) we can plot in the y,k space the
relations y=0
and
k=0.
The f.o.c.
are:
83
Fig.II.18
k
84
2
(aqI/kT)(3kT/Dk)+(he/pk
II.20)-
,
(k/akT)
(akT/3k) - n
> 0
=-
3k=02
(kq Iapk)(aPk/ay) + (he/pk 2(apkI/y)
11.21)
ay
Dk
y=0
Fc
+
_k
c
ak
apk DkT Dk
3kT Ak
apk AkT ak
akT ak
aCd (a) akT
9_ 3kTAk _kT
'kT
akT
1-s
k
> 0
-
1k
(l-s)
q-
apk ayk
aC (a)
apk
apk
ay
1
1-s
These relations can be expressed graphically as in Figure 11.18.
In the next section we analyze the case in which fiscal policy is
used to stabilize the rate of inflation.
We leave aside the role of
monetary policy, which largely follows the line of fiscal policy.
3.1
The effects of an increase in the government share of capital
A sudden increase in the government share of capital,
, through
nationalization, affects our two dynamic relations (capital accumulation;
stock of government debt).
If an increase in
is not followed by any
change in the government propensity to consume, the effects on k=0
will depend only on the increase in the price of capital, Pk.
A higher
price of capital increases the production of investment goods and decreases the government demand for investments in terms of their own price.
Thus, at the previous points i>0, the schedule has to shift to the right
85
to (k=0) .
The increase in
0
P
due to a higher
, enters the y-equa-
tion in three ways.
Then
-
by decreasing the production of consumption goods
-
by increasing total income, g
-
by increasing private wealth, a
becomes negative and shifts rightward to (y=O)
as in Figure 11.19.
We will now verify the condition under which the k=O schedule
shifts more than the
y=O
schedule leading to a higher intensity of
private capital under steady state conditions.
At the point corresponding to k* on the (k=O)
we have:
0
-
a higher pk due to the increase in 6
-
a higher k T,
-
a lower
because for the same k*,
is increased
y , so that j > 0 at the point on (k=0) corresponding
0
to k* if:
-
the net effect on the price of capital, due to an increased S,
and a decreased y is a decrease in
Pk'
If we do not consider any wealth effect, we have:
either:
an increase in the production of consumption goods, the element
ny decreased and the total income decreased (the effect
on Pk
)
is stronger than the one on k
or:
income effects are completely outweighed by the other two
effects.
If the combination of all these effects is such that y<0 at the
--------A-;-
86
Fig. I1I.19
k=o
Y
YO
4
y.
0
-
k
k*
K0
k
87
Fig.II.20
A
y
0.=
O
~
k*
k
88
point on (k=O)
right to
corresponding to k*, the y=0 schedule shifts further to the
(y=0)1 , and the steady state intensity of private capital
decreases.
This situation becomes more likely if we take into account
the wealth effect of the price of capital, Pk, and the total intensity
T
of capital, k
3.2.
Government investment programs, inflation, and the intensity
of private capital
In this section, we consider the case of government announcing a
permanent increase in its propensity to invest in order to increase
in
tion,
=
7
m
7r
m
.
the long run, given the target of maintaining a constant rate of infla-
The increase in h leads to a k<O , and the new schedule shifts
In the y schedule, a decrease in (1-h) makes
Then it shifts to the right to (Y=0)
0
T=0 negative.
, as in Figure 11.20.
The inten-
sity of private capital in the steady state condition decreases to k
.
leftward.
Consider now the hypothesis that the government announces an increase in the rate of inflation, i.e. a decrease in 7T .
m
A lower T makes
m
k positive, as a result of the increase in the production of investment
goods.
On the other hand, the
decrease in
Fm
y schedule is made negative, because the
increases Pk' which leads to a decrease in the production
of consumption goods, and an increase in both income and wealth.
The
two schedules shift rightward.
Under these hypotheses, the government can provide a program of
investment, "financing" it through inflation in a way such that the long
89
run intensity of private capital remains unaffected.
This is the case
of (k=0) 1 and (y=O)1 in Figure 11.20.
Clearly, the given result depends on:
-
the size of the investment program and the size of the increase
in the government propensity to invest, h
-
the related level of the perfectly anticipated rate of inflation
-
the relative sensitivity of the k and y schedules to both the
government propensity to invest, h, and the rate of deflation
TF.
m
As a side result, a lower steady state real value of the government debt will be obtained.
4.
Imperfectly Anticipated Inflation and Government Corporation
Investment Programs
In the previous sections, we proposed a two-sector growth model
for the case of a mixed economy.
Government expenditure was for both
consumption and investment goods, such that a government share of physical assets could be maintained in the long-run.
ment hypothesis that we considered,
Under the full employ'-
room for government capital was
proved to be available so long as higher rates of inflation could be
borne by the whole economy.
Indeed, the intensity of private capital
need not have been reduced if government investment programs were correctly processed together with traditional fiscal and monetary tools.
The framework developed in previous sections was limited to the
90
cases in which the government aimed to fully control the price of money
or its rate of change, i.e. a zero or a perfectly given rate of inflation
were considered.
Beyond that, any change in the price of capital was not
included, i.e. the possibility and the effects of capital gains in both
the assets and goods market were ruled out.
Although convenient for
analytical purposes, such a framework cannot be considered sufficiently
close to positive conditions.
Under a market economy, government agencies can take decisions
that are "independent" from the rest of the system only in an ex-ante
situation.
Different forces and sharing of power will indeed produce
ex-post solutions that are not under full government control.
Therefore, to complete the analysis for the case of a mixed
closed economy we need to consider the possibility of the government
using its fiscal-monetary policy tools and performing investment programs, but no longer being able to control prices, which are now determined by the market.
The first section will consider expectation rules on the price
of money, pm, taking the price of capital, Pk, as constant.
Later,
expectations of changes in the price of capital, pk, will be introduced.
Previous solutions have already pointed out the relations between
the intensity of private capital and the real value of government debt.
Therefore, whatever the market behavior, we already know that the steadystate rate of inflation has to be equal to the rate of growth of per
capita nominal government debt.
Indeed, a constant steady-state value of the intensity of private
91
capital is not sustainable under a changing "real" value of debt.
The government could always run different deficits, affecting
both its own debt and its share of the capital stock until such a share,
6, is led either to zero or to one.
Because the government uses fiscal and monetary tools that do not
stabilize in full the price level, the price of money, pm, is derived
from market behavior expressed by the shifting equilibrium relations in
A model of
the assets market, aa, and in the consumption market, cc.
expectations regarding the rate of inflation is now needed.
For the sake
of simplicity, we assume an adaptive expectation behavior to be followed
in the market, as shown in (II.6**).
The complete model, assuming imperfectly anticipated inflation,
is then given by:
II.l**) k
II.1** .k
q1 (kT' k) - (he/pk) - nk
=
=q
.1.* bis)
he
= d
=
II.2**)
g
II.3**)
Pk = c (y, k
II.5**)
II.**
11.6**)
II.7**)
qc(kT
SpkqI
is assumed to hold
ng
-
i = $(y,
I1.4**)
nk
k
I (k
k
where relation (11.12)
-k
(kT,P)
k
7,m' 7rk' X)
kT
-
'
'Ik' X)
7m'
(1-h)e
=
Cd[(1-)kTk + gp ] + (1-s)
(q + i
-
ny - e)
w=ca~pIp - ir)
m
fT
irk
=
m
m
II.8**)
x = x*
II.9**)
e
=
e*
92
II.10**)
d = (6 + n)g
II.ll**)
kT = k + kG
Once again we have a complete system of thirteen equations with
thirteen unknowns.
4.1
Static Analysis
The static performance of the model is given by
the pmpk
and i values.
-
kT
-
7k = 0
k
All the other variables are taken as given.
,
m
are given by historic values
is assumed
- e, x, d
- h
g, 7r
In particular:
are given by government decisions
follows condition (11.12)
Therefore, the assets market relations are:
11.22)
11.23)
p
i
T
=
4(y, k
=
$(y, k
k
T
,
, rr, x*)
,
, m, x*)
m
The equilibrium condition, aa, can be plotted in the pk1y space.
As previously shown, such a relation is upward sloping, since apk/3y has
already been proved to be positive.
It is also upward shoping with res-
pect to increases in the share of government owned capital.
On the other hand, the shape of the consumption market equilibrium relation is dependent on both the rate of deflation and the rate
of growth in the nominal stock of government debt, e.
Since, in the long run, the condition y = 0
implies
93
(g/g)
= -
(m
11.24)
in the following consumption market relation:
'm),
q
-
d
T
(1-h)e* = C [(l- )k p
+ y] + (1-s)[q + (6+n+r )y-e*]
the value of the term (0+ n + 7m ) is positive.
In this situation an
increase in y increases disposable income and leads to excess demand for
consumption goods.
Hence the price of capital, Pk, has to decrease to
clear the market again.
Then, the equilibrium relation will be downward
sloping, as shown graphically in Figure 11.21.
The role of the government share of capital,
ment propensity to save, h, can easily be described.
, and of the governAn increase in
requires a higher price of capital to clear the assets market.
6
If the
wealth effect is ruled out, no shift will be experienced in the consumption goods market.
Hence a lower money value of government debt, y, will
be produced together with a higher price of capital, as shown by the
schedule of a1a1 in Figure 11.22.
If wealth is included in the demand conditions for consumption
goods, then a higher
, decreasing the share of private capital and
wealth, leads to an excess supply.
An upward movement in cc is needed
and an unclear effect on the real value of debt is produced. 4
On the other hand, the effect of a higher government propensity
to invest, h, will always be determined with respect to both pk and y.
Noticesthe assets market is not affected by the movement of h.
In the
consumption goods market, an excess supply follows from an increase in
the government propensity to invest.
The cc schedule shifts upward and
increased values of Pk and y will clear both markets.
Hence, the following conditions (II.25) can be stated:
94
pk/
a
>
0
ay / 3a
<
apk /
a5
>
0
ay / 3a
<0
0
+-
if no wealth effect
+~
if wealth effect is
apk / 3h
>
0
3h
>
0
apm / 3h
>
0
apm
3y / 3h
apm /
3a
>
0
<
0
<0
+
included
+
if no wealth effect
+
if wealth effect is
included
Equations
11.25
95
Fig.II.21
Pk
aa
Fig.II.22
a1 a
Pk
aa
Pkl
Pk
cc
Yl
y
Y
96
4.2
Dynamic analysis
The dynamic conditions of the complete model under imperfectly
anticipated inflation are fully determined by the differential equation
of the expected rate of inflation and the private capital accumulation.
By differentiating (11.22) and substituting it into (II.6**)
we obtain:
7r
m
11.26)
Then, given
Tr
m
,
=
o [(1/y)(Dy/3k )(1/(1-0)) - 0 -
m
)]
/r
]/[l-cU(l/y)(3Y/D7r
m
Q*, e* x*, the expected variation of the inflation rate
is a function of wr
m
and k.
The second dynamic condition is the usual private capital intensity:
11.27)
k = q1 (kT, Pk) - he/pk
nk
-
which can be expressed either as:
11.27')
i = (1- )q
if (11.12) holds, or
11.27")
nk
-
as:
k = qI - nk
-
nk = q
-
nk/(l-0)
if the target is to maintain a given per capita
intensity of government
capital rather than a fixed share, S.
In the r ,k space, there is no definite way of determining the
m
shape of these functions.
Hence, to work out a possible solution of the
system, some further assumptions need to be made.
Along the i relation we have:
97
@qI OPk
he
__k
2 3r
3pkaBr
11.28)
m
=
m
k=O
m
3qI @kT
q
k 3kT
T Dk
p
T 3k
ak
k 3k
he
k
2
pk
kT
T3k
n
3
which is positive or negative according to whether:
<
2
1(3q I/pkl > Jhe/pk
)
II.29)
Therefore, given the effects of the price of capital, pk, on the production of investment goods, the higher the per-capita government expenditure the more likely is it that the k=O schedule will be upward
sloping.
Alternatively, given "e" constant, the higher the government
propensity to invest, the more likely it is that
positive.
[ak/Damli= 0]
will be
As we shall see, in both these situations, the system is more
likely to experience unstable conditions.
Let us turn now to analyze the i=O slope.
Such a relation holds
if:
T)(
(1/y)(Dy/k )k(k/(l-))
= 6 + 7
Therefore, an increase in 7T makes IT negative, both because of
m
m
the increased value of the right hand variables and because of a reduced
Pk, which decreases the production of capital goods, i.e.
k/(l-)<O.
However, this outcome depends on the sign of the denominator in
(11.26).
Hence, the
m=0 schedule may be downward sloping if either
98
Dy/3T < 0
or, in the case that it is positive, a very small a. moves it
below one.
Since a is the value of the speed of adjustment of expecta-
tions on Tr , with respect to actual prices, this result shows that the
faster the adjustments are undertaken, the more likely it is that the
iTrM=0 schedule will be upward sloping,
and the more likely it is that the
system will become unstable.
Now we can state:
11.30)
-
= =0
Tm=0T
U
m
T
(1/Y
3
T
)(ak T /Dk)(Dk/Dk)
] <
0
The two schedules and the stability conditions are presented in
Figure 11.23, panels a, b and c.
Some interesting findings can now be outlined.
Following
condition (11.29), we know that the higher the per capita government
expenditure, the higher is the share of government capital,
, i.e. the
higher is its propensity to buy capital goods according to (11.12), the
more likely will the k0 schedule be upward sloping.
But the higher
the slope of the k=0 schedule with respect to the
schedule, the
iT =0
more likely is it that the system will become unstable as the three
panels show.
The effect on instability of the speed of adjustment of expectations, a., seems to be minor compared to the effect of the size of government expenditure.
Indeed, even if a is high enough to give an upward
slope to the Trm=0 relation, it does not always lead to instability, as
can be seen in Figure 11.23, panel d.
99
Fig.II.23
panel
(a)
k
0
k=O
0
m
0
Trk0
k
>m 0
100
Fig.II.23
-
panel
(b)
m
o
k
k<0
<
<0
k >0
k>
0
m
TT>
Fig.II.23
-panel
=0
(c)
m
k<
0
k >0
k <0
ir m < 0
kc >0
7Tm > 0
7rM > 0
<0
=0
-
m
k o
101
Fig.II.23 - panel
(d)
Tm
1
k
=0
m
k <
0
m
o
k <O0
T
>0
t
k >0
TTm >0
k >0
'I0
<0
m
k=0
102
4.3.
Effects of an increase in the government propensity to save
An increase in the government propensity to save enters the k=o
schedule without affecting the nr =0 relation.
m
Indeed, a higher government propensity to invest out of a given
expenditure, e*, makes k<0, and the related schedule shifts to the left,
provided the negative slope case holds.
As can be seen in Figure 11.24,
a lower intensity of private capital and a lower rate of inflation will
represent the new steady-state solution.
However, as we have just seen, the higher the government propensity to invest, the more likely it is that the system will become
4.4.
See case (k=0)
2
'
unstable.
Effects of an increase in the government share of capital
A once and for all nationalization leading to an instantly increased
S affects both the dynamic relations.
Indeed, because the price
of capital is increased by the decreased share of physical assets available to the private sector, the k schedule will show positive values at
the old zero points.
reach the new k=0.
Hence, an upward movement will be necessary to
The
m becomes positive, too, and an upward shift
7F
will restore it to zero value.
Not surprisingly, therefore, an uncom-
pensated nationalization may lead to an increased per capita intensity
of private capital.
Indeed, an excess demand of capital in the asset
market will cause Pk to increase, and production of investment goods
will then be stimulated.
In addition, a higher rate of inflation
103
Fig. II. 24
m
k
U
k
I
I
ml
k=0) 2
Fr*
=0
(k=0)
k=0
104
Fig. II.25
7m
k2
k*
k
k
Tm2
(Im =
2
m
=0)
t=0) 1
T
=0
k=0
105
results, also contributing to the stimulation of private decisions to
hold physical assets.
While such results are possible, there is still some uncertainty
as case (=)
proves in Figure 11.25.
Let us work out such a case in some detail.
If we consider the shift in
either
7Tm>0,
k=O , at k* in (k=0), we can have
in which case the new steady state will refer to a higher
intensity of private capital as in k
or
'im <0
which leads to a
.
reduced k at k
2
Now, according to (11.26), since k=0 at k*,
ml, the sign of
mm
rm will be given by:
<
-
0
c(l/(ay/7rm
)
1
Therefore, the intensity of private capital will be reduced.
that
7
<0 at k*,
This means
ml, if the nominal rate of growth of the government
debt is higher than the rate of inflation at k* along (k=0)1 , or if the
speed of adjustment of expectations,
inator of (11.26) negative.
a, is very high, making the denom-
An interesting result is related to the
possibility that private capital intensity will be increased if at k*,
7riml,
the rate e is higher than Tr l, while a high speed of adjustment, a,
leads to a negative denominator such that the ratio becomes positive,
i.e. the
m=0 schedule shifts at some (7r m=0) 1 .
In this situation, the
intensity of private capital increases, and the rate of inflation decreases.
106
4.5.
Government investment programs, imperfectly anticipated
inflation and the intensity of private capital
We have already proved the possibility of "available room" for
an investment program under perfectly anticipated inflation.
Fiscal and monetary rules to be followed in such a case were
made explicit.
We will now repeat the experiment for the much more attractive
situation in which the government does not have full control over the
price level and the rate of inflation.
An increase in the government share of capital,
, with a con-
temporaneous increase in the government propensity to invest, h, in
order to maintain
at its new high level affects both relations rm and
k.
The private capital accumulation condition obtains negative values
due to the increase in h.
left.
Thus, the k=O schedule shifts downward to the
determines a positive im, and the
As before, an increase in
zero values will be met at a higher level.
Figure 11.26 shows the new situation.
Once again the effect is to reduce the intensity of private
capital and the rate of inflation.
It is interesting to note that this effect can be avoided if the
government increases the rate of growth of nominal debt, 0.
lead to an increased 7r
m
This will
which, by entering the ' =0 schedule, will
shift it downward to some
m
(7r"
30)
107
Fig.II.26
m
k
k*
7ml-
(7r =0)
.T*
=
(k=0)T
=0
m
2
108
Therefore, if the government does not control in full the rate of
inflation, but general adaptive expectations are met, the possibility
of performing government investment programs without affecting private
capital intensity is open as it was in the case of a perfectly anticipated inflation.
However, between government investment and a higher
rate of inflation, a trade-off still has to be borne.
5.
Expectations on Capital Gains
The last working assumption we must remove in order to complete
the test of the full model presented in Chapter 1 is the exclusion of
capital gains.
Expectations of changes in the price of capital, pk, are clearly
limited to short run analyses.
In fact, once a steady state is reached,
a given pk will hold and zero capital gains will be expected.
However,
as we have seen in the previous section, the inclusion of the expectation element affects the long run solution.
This is mainly due to the
stability conditions of the steady state growth.
To simplify the analysis, let us consider a price level stabilization target met by the government through the use of monetary and
fiscal policy.
From previous solutions, we
may state the assets market equili-
brium conditions as:
11.31)
pk = 4(y, kT,
11.32)
T
i = $ (y, k ,
,
7,
m,
"k,
7'r
x)
where
k
x)
where
apk /k
ai/auk
>
0
>
0
109
and the consumption market equilibrium condition
11.33)
q
-
d
T
(1-h)e = C [(1-)k p
as:
+ gp ] + (1-s)[q + (d +
r g)p
- e + fkkk (1-)]
The standard slopes of the two schedules still apply.
(See Figure 11.27).
In such a situation, the effects of the government carrying out a
once and for all nationalization, increasing
to both schedules.
The consumption goods market is affected through
reduced income and wealth.
be matched.
without affecting h, refer
Hence, a situation of excess supply has to
Therefore, the price of capital increases
and the cc
schedule shifts upward.
In the assets market, an excess demand of physical capital
follows an uncompensated nationalization.
capital has to be raised.
There, too, the price of
Therefore, the new equilibrium is reached
at an increased level of the price of capital.
An uncertain effect on
the price of money is the result.
More complex is the case of a government pursuing a higher share
of capital through a higher propensity to invest out of expenditure.
Within the consumption goods market, such an operation affects
both demand and supply.
If we exclude the wealth effect, the final
result depends on the following conditions:
11.34)
(a)
(1-h'+h)e = 7kkk
(b)
(1-h'+h)e =
(c)
'
+
No effect
rk kkT(-S'+6)
+
Excess supply
(1-h'+h)e = Tkpkk T (l-S'+6)
+
Excess demand
110
Fig.II.27
Pk
a1 a
aa
Pkl
k~1
C
cc
Pm
Pml
p
111
Fig.II.28
k
a 1a
aa
C2C2
k
cc
C IC
112
where h',
' are the new policy variables.
Therefore, the cc schedule can shift in either direction or even
not move at all.
The aa schedule will, instead, have to make a unique
movement upward to fill the excess demand of capital.
Thus, as presented in Figure 11.28, many solutions are possible.
Under the c1 c1 case, p
increase.
decreases, and pk may either decrease or
An opposite situation will occur if the cons-mption market
clearing equation moves upward to match the excess supply.
The price of
capital will this time increase, while pm will still be subject to an
uncertain result.
5.1.
Stabilization policy through monetary and fiscal tools
Once monetary policy is used to stabilize the price of money at
Pm*, the price of capital pk will no longer be determined within the
assets market, but will be fixed by the conditions of the consumption
goods market.
If we reconsider Figure II .39 as referring to the un-
compensated nationalization leading to a higher pm, from pm* to pml, in
order to stabilize the price of money, the government has to perform an
open market purchase to move the assets market clearing
relation to a2 a2
In this case, a lower "i" will lead individuals to demand more capital,
and a higher pk at pk2 will be needed to meet such excess demand.
We
refer to such a case in Figure 11.29, adapted from Figure 11.27.
As shown, the new equilibrium level of pk2 is determined by the
shape of the consumption market clearing equation cc.
113
Fig.II.29
a2 a2
a1a
aa
Pk2
Pkl
cc
m
ml
M
114
Fig.II.30
Pk
Pkl
a1
1
aa
Pk2mo
kA
m
ml
m
115
Therefore, the new equation (11.35) has to substitute the previous relation for the price of capital:
pk =
11.35)
(k
k' g*p*, e)
where we can state
11.36)
(a)
3C/a
>
0
under uncompensated nationalization or while (II.34b) holds
(b)
3C/3
<
0
if (II.34c) holds
Some uncertainty is clearly attached to the operation the government needs to perform.
Indeed, if a1 a
is above the
a2a2
schedule,
an open market sale will be necessary.
Under a fiscal policy
stabilization used to meet the situation
in Figure 11.27, the government manages the consumption market schedule.
In Figure 11.30, it is shown that the impact effect will lead to
Pkl' ml
on the
c1 c1
and aI a
schedules.
Therefore, to reestablish
the price of money at pm*, a higher government expenditure is needed to
c2 c2
'
move cc back to
5.2.
Some dynamics under fiscal policy stabilization
Dynamic conditions for a system including capital gains or loss
expectations may be worked out with the following two differential equations:
11.37)
11.38)
k = q1 (kT, Pk) - he/pk - nk
T1k =
b(pk/ k
-k
116
where once again adaptive expectations are considered to be met in the
capital markets.
Under a balanced budget fiacal policy to stabilize the price of
money, and given the level of
of only k and 'Trk*
11.39)
, the price of capital will be a function
Hence, we have:
pk = p(y*, k,
*,
x*)
k
which can be differentiated and substituted into (11.37) and 11.38):
11.37')
k = q1 (kT,4) - he/k - nk
.3
II. 38')
(kT,$)
=b{(l/pk)(a4/kT)[q
Trk=
-
he/# -
k
In the k,pk space, the two schedules can be proven to be both
increasing and crossing one other at fk=0.
Indeed, along the k=0 schedule, an increase in k reduces its
rate of change by:
-
reducing the output of investment goods, since the hypothesis
of higher intensity of capital is met in the production of
consumption goods
-
reducing pk and therefore the production of investment goods
-
requiring a higher production of investment goods to be self
sustained
Hence, if k increases, even
equal to zero.
7rrk
needs to increase to keep k
117
In (11.38), an increase in k increases 'lk.
7k
k=0 again.
has to increase to reach
Because of (11.20'),
This proves that
nr=0
is
increasing in the k,lrk space.
Finally, they cross each other at
and
7rk=0
k=0
,
then
ik
7k=0
because in (11.38),
must also be zero.
Stability of the system requires
k=0
to be steeper than
TkFO
This result is more likely to be obtained if b is small, i.e. if expectations do not adjust rapidly.
5.3.
The role of government owned capital and expectations of
capital gains
The model we have investigated can now be used to verify the impact
of a government managing physical assets under price change expectations.
A nationalization, i.e. an increase in
dynamic schedules to the right.
and
7
rk to be positive.
f, will move the two
Indeed, a higher
will cause both k
Hence, the intensity of private capital will
increase in the steady state solution, as shown in Figure 11.31.
If an increase in the government propensity to save, h, follows
, the previous result is not certain anymore.
Indeed, if the effect of the increased
[kT/3k =
1/(l-S)] and
j
in the term
is smaller than the' effect in the term
he
,
the increase in
the two schedules might even shift to the left, leading to a lower k.
If such a case holds, Tk becomes negative, and a leftward movement will
be needed to clear the market under the new condition.
118
Fig.II1.31
Trk
k=0
(k=O)1
(k
k0
u'
0
k
-0 7
119
Chapter III - GOVERNMENT INVESTMENT PROGRAMS IN THE OPEN-ECONOMY CASE
In the previous chapters we dealt with the management of government investments in a closed economy framework.
In the two sector growth
model with which we worked, we focused on the existence of a trade-off
between government corporation
ly owned capital.
investments and the intensity of private-
This trade-off was proved to be "manageable" if a
higher steady rate of inflation were supported.
The trade-off is then
between an additional investment process and the economic and social
costs of ever higher price levels.
The need to coordinate the traditional tools of fiscal and
monetary policies with the management of the government corporation
growth process was also emphasized.
What we will do now, is to extend our model to include the case
of an open economy.
Within such an economy, we will explore both the
limits and opportunities open to government investment behavior.
international trade and capital movements are introduced into
If
the
analysis, the accumulation process, given the long run growth conditions
of the economy, is no longer constrained by the domestic production of
physical capital.
Indeed, the demand for investment goods can always be
satisfied by import flows.
A new constraint may, however, be met be-
cause of the necessity of balancing foreign accounts, at least in the
long run.
International trade and monetary theory clearly points out the
importance of the relative size of the economy.
The cases of a "small
120
country" and "two-equal-sized-countries" are now very well established
in the literature.1
In this section we will examine both models and explore our main
target which is testing the conditions under which government corporations represent an additional tool of policy, filling either one of the
traditional targets of internal and external stability, or meeting
a
"third" goal, like capital growth or welfare optimization.
We first re-elaborate a standard two-country model, including
the case of the assets market relations.
run growth path for this economy.
Then, we work out the long
Finally, we examine the effects of
government investments in both countries.
In the second part of the Chapter, we examine the case of the
"small" open economy, and also examine the effects of governments'
investment decisions made within an international competitive framework.
1.
A Two Country Model of International Trade and the Effects
of Government Investment Programs
The model presented in Chapter I, modified along the line proposed by Foley and Sidrausky,2 provides the basis for our analysis.
We
maintain the hypothesis needed to include a government making competitive decisions in the market.
Two goods, investments and consumption, are produced under the
same technology by two equal sized countries.
nationally traded at a fixed exchange rate.
of money, bonds and physical capital.
The two goods are interThe assets market consists
The last two are freely traded,
121
while, because of a fixed exchange rate system, money supply satisfies
only domestic demand in each country.
The two governments are allowed
to use fiscal and monetary tools which in turn affect the whole system,
given the existence of open channels between the two economies.
As we
shall see more clearly later, many policy paths then lead to the same
stability target.
Therefore, the distribution of the burden of monetary
policy leads to the final allocation of international reserves, while the
distribution of the burden of fiscal policy determines wealth and/or
income consumption distribution.
The major issue we aim to emphasize is the ability to manage
government expenditure for investment goods in order to increase the
domestic and world rate of accumulation, allowing the whole system to
move
toward higher per capita consumption.
Thus, the main point is
that there are different ways of sharing both the burden of fiscal and
monetary policy, and the increases in wealth.
For the sake of simpli-
city, we allow only one government, for instance Italy, to manage
competitive corporations.
The other country, say West Germany or France,
or alternatively the European Economic Community, follows the standard
pattern of no direct intervention in competitive market.
The new tool
of government investment management needs, however, to be coordinated
with fiscal and monetary measures.
Because the economies are open, both
countries must agree on the instrumental use of government investments,
just as they had to do in the simpler framework of indirect intervention
through the traditional policy mix.3
The possibility of the independent use of government investments
122
may widen the range of targets the government might aim to pursue.
As
we shall see in the following chapter, a welfare maximization goal can
be reached by using government investments to push the economy toward
the optimal path of capital accumulation, with monetary and fiscal tools
guaranteeing internal and external stability.
So far we have tried to sketch the possibilities open to government investments.
Several constraints, however, may also be met.
They
are clearly related to the meaning we gave to government corporations.
Since they enter the government budget, the critical feature is then
given by the endogeneity of either the government propensity to invest
or the government share of capital.4
In the last case, any long run interest in government corporations
would obviously be lost.
The first case would instead imply the poss-
ibility of switching government expenditure from consumption to investments goods.
This possibility may not even exist in real economies where
government demand is often rigid.
is always met.
In any case, at least one constraint
The government propensity to invest out of expenditure
cannot exceed unity, and it ultimately competes with private demand for
capital goods, pushing toward an undesirably low intensity of private
capital.
In this case, there may be a tendency toward a full planned
economy, eliminating the "mixed economy."
1.1.
The production sector and the conditions of capital growth
Production processes in the two economies are undertaken with the
same technology following a production function, which is homogenous to
123
the first degree.
The consumption goods sector is supposedly the most
capital intensive.
Factor price equalization occurs and leads to the same
remuneration of inputs wherever they happen to be located.
Specializa-
tion paths are therefore ruled out.
In such a world, the previous conditions of production still
hold:
III.1)
q1 (kw, pk
=
production of investment goods; small
letters refer to per capita values referred
to world population; superscript w indicates world values.
111.2)
kkw,
) =
qc
production of consumption goods
Standard signs on the derivatives
q I/akw < 0
q I/@pk
also apply here:
0
q C/k
> 0
aqc
p
< 0
The law of capital accumulation follows the technological conditions given by the production functions.
At a world level, new addi-
tions to the stock of physical assets are given by the world production
of investment goods:
111.3)
k =
w(kwp k
nk
The allocation of this production to the two countries depends on
their demand for capital, competing in the world market for the available
supply of goods.
In the case of market clearing we have:
124
111.4)
(a)
E
k
E
=
E
(q
Pk m, i) - nk
E
I , Pk' PM, i)~nTI
+ (he/pk) - nk
I
kI = $(q
(b)(b'TI
where total capital belonging to economy "I" is owned both by private
and governmental groups according to:
(c)
k=
(d)
k
(q I , pk
_I
-G
(he/pk)
-
PM,2 i) - nkI
I
nk
G
We may therefore define an accumulation law of world "private" capital
as:
III.3')
q(kw,
=
k
-
(he/pk) - nkP
As can easily be seen, in an open economy framework, the government demand of investment goods does not compete directly with the domestic
private demand of capital.
The last can always be met by imports.
How-
ever, in a two country world, it constrains "world" accumulation of pri-
111.5)
The following definitions may then be set out:
(a)
kw
=kE + kTI
(c)
k
= kI + kG
where (III.5d) kG =
111.6)
kwp = kE + k
kTI can be resumed as done previously.5
*E +
'=+k*
(b)
(a)
kw =k
(c)
kTI =I
T IO
+k
+ kG
=
(b)
E
+
vate capital.
Therefore:
125
The law of physical capital accumulation here refers to the ownership of capital rather than to physical localization within each country.
Indeed, in a perfect world market, investors are completely indifferent
between localizations of capital.6
behavior of residential capital.
Thus, we have ignored so far the
Within a small country framework,
this uncertainty has been resolved.
A simple way to deal with such
uncertainty in a two country world may be related to the condition of
the labor market.
Within the two countries considered, there is to be
a population of equal size and rate of growth.
However, the growth pro-
cess would require either labor migration or capital movements between
the two systems.
Then, if some once and for all migration cost is
attached to labor, while capitalists still remain perfectly indifferent
to localization patterns, the hypothesis that capital moves wherever labor forces happen to grow, may be outlined.
It would depend not on the
demand conditions for investments goods, O's, but on relative factor
supply.
We then have:
111.7)
. E
= q
N E ep(
Nkw
N exp.(n
(a)
kR
(b)
kR
(c)
kRG = (he/pk - nkRG
k
=
k
tE) E
+ a)t
w
N exp.(n +
(k,
P
NIwek
q 1 (k,
~)Nwexp.(n
+
E
EkRE
a )t
)t
)t
-
I
(he/pk) -n kR
where the subscript refers to "residential" capital, i.e. located within
each country.
126
In this respect, the demand for investment goods of the govern,
ment affects private demand, since it
country for residential capital.
directly competes llwithinll the
As we noted before, private demand
might always find a foreign supply, but it has, in any case,
with domestically located government capital.
to compete
In (111.7) we obviously
included the case of a differential rate of population growth.
Such
differentials may result from a different rate of growth of factor
supply or differences in their productivity.
augmenting technical progress, a parameter
For the case of labor-
a, can also be included.
Therefore, we have two different ways of approaching capital
accumulation:
one refers to ownership and one to location.
chance would they give the same result.
Only by
Within an open economy, it
is then possible to verify that if domestic demand for capital lags
behind the growth of the labor force, an increasing share of foreignowned capital will enter the economy.
The full employment target is
always assumed to be met in this framework; it may also be reached with
a different share of ownership between domestic and foreign capitalists.
Under our simple assumption, government corporations can affect such
a share.
Indeed, if private demand for capital falls short of the given
growth of residential capital, government corporation demand can, fully
or partially, fill the gap.
Within the competitive framework we assumed, the dynamic relations
of the model will be referred to as ownership of capital.
We overlook
the need to verify the physical location of capital or labor migration.
So far we have dealt only with the investment goods sector.
But
127
what about the consumption goods market?
With a unique technology,
world production of consumption goods is given by:
111.8)
qc kw
k
For the sake of simplicity, demand conditions are here limited to the
linear income relationship.
Available income in each country is given
by:
111.9)
III.10)
yE = w(pk) + r(pk)kE + i(bE - bE )pm + ib-Em
_
I
~I
= w(pk) + r(pk )k
y
+ i(b
I
- b )p
+ ib p
E
- T P
where the interest flows refer to net holding of bonds, which in turn
are given by the difference between total bonds owned minus the bonds
issued by the domestic government.
mined through the budget constraint.
The value of these bonds is deterIn (III.10), clearly the return
on government capital, .rkG, does not appear explicitly, since it is
already included in the government budget constraint.
The world consumption market clearing equation, including government demand for consumption goods, is then given by:
III.11)
where sE' s
qc kw, pk) = (1-h)e + (1-s E)y
+ (l-s 1 )y1
are the private propensities to save.
128
1.2.
The Assets Market
Since bonds and capital are considered as perfect substitutes
and each country's money remains within the issuing economy, four
equilibrium relations are needed to clear the assets markets.
Two of
them are given by:
111.12)
pkkTI + JE + JI = Pk E + Pk (-6)K
111.13)
HE + H
+ pk k T
pkk
= p EE + pb
m
m
where:
I
E
JI
J
E
(a ,
E
q, Tr,
m
EE
~m
E
E E
E
H = H (a, q,r
H
I
i+7r ,
m
I E
E
= H (a , q ,
m
r(pk)
p
r(Pk
pk
E
+ Trkpkk
)
= J
E
+ Tkkk
E
+ Tkp k)
,
m
i+7r ,
m
r(Pk)
p
,
m
i+7r ,
r(pk)E
+ wTkp k
k
m
)
E
J
are respectively the European and the Italian demands for capital and
bonds, expressed as a function of private wealth, income, and rates of
return.
Previous signs of the derivatives also apply here.
Now, by the Walras law, the system is assured world equilibrium
in the money market.
Such a condition does not, however, refer to the
equilibrium within each market.
We know only that excess demand for money in one country will
necessarily correspond to excess supply in the other.
A reserve asset
129
is therefore needed.
own this asset.
We call it
z
m
Only governments are allowed to
.
Private operators are obliged to exchange it for local
To facilitate this latter operation, the government guarantees a
money.
fixed rate of exchange.
Therefore, to the two previous equilibrium con-
ditions, two money market clearing relations have to be added:
I1I.14)
E
E
(g /x )p + z
m
m
rrkkkk
111.15)
(g /x )p
)
)
k pk
pkkpkk
with z
m
E
=
I
-zI
m
E
E
E E~
=L (a, qE, T , i+r ,
k)
= L (a1 , q1 , Tr , i+ ,
m + zI
m
m
m
k
p
since the international stock of reserves
E
+
+
+
considered
fixed at z has been previously allocated between the two countries at a
-I
-E
level z and z respectively.
To the four equilibrium conditions, we may relate the following
wealth constraints:
111.16)
awp = aE + a,
111.17)
aE
111.18)
a,
total private world wealth
kkE + p bE +
= pk(1-)k
+ pMb
E
kkE + pM(bE - bE )+
+ pMm
= Pk(1- )k
pMgE
+ pM(b -bI)
+ pmgI
which represent a system of two independent definitions.
Thus, only two equations of the (111.12) ent.
(111.15) are independ-
130
As in the previous cases, assets market clearing relations can be
shown graphically in the pk,i space for any value of pm.
bonds and capital market as the independent equations.
Consider the
The world money
market is in equilibrium at their crossing point, but the money market
clearing equation of each country may not be in equilibrium.
The shaded area in Figure III.1 can be excluded as a possible
solution for the bond market clearing equation.
The latter has to cross
the kk relation somewhere between points A and B, say C.
At that point,
Pk* and i* will determine equilibrium in both the bonds and physical
assets markets.
As Figure
clear the money markets.
cross one another at c.
III.1 shows, reserve flows are needed to
Hence the two "m" relations shift until they
Such an equilibrium position may also be
reached without any reserve flows, if there is a sudden exchange rate
movement.
However, so long as the excess supply of money lasts in one
of the countries, then a continuing devaluation is needed.
case, bonds must be indexed to consumption good units.
In such a
Otherwise, expec-
tations on the rate of exchange devaluation might introduce market instability, as in the case of capital gains.
We will now perform two simulations on the assets market.
First,
we will try to measure the effects of what we have called an uncompensated nationalization.
Then we will simulate a "government take-over",
balanced by the issue of either money or bonds or both.
When the share of government owned capital is increased, a situation of excess demand appears on the capital market.
Indeed, the supply
of physical assets to the private sector is decreased by the increase
131
Fig.III.1
E
m
/
E
II
0001
kk
bb
132
Fig.III.2
Pk
m1
Pk2
m
Pkl
k k
kk
bb
i1
i2
i
133
in
, while wealth effects decrease the demand according to
which we proved to be less than unity.
aJ/a
The kk schedule shifts upward
to clear the market again.
In the money market of economy, E, nothing happened to shift
the relation.
In economy, I, the money market shows an excess supply
I.
due to the wealth effect in L
Clearly, if the nationalization is
compensated by issuing money, an even higher excess supply of money will
be produced, and similar results would therefore follow.
schedule shows the new clearing condition in Figure 111.2.
The
m
An increased
price of capital will then be the result, while an uncertain effect on
i would be produced.
mE
Indeed, the reserve flows will affect the m1 1
until they cross one another.
of the interest rate, between i2
and
At that point, a new equilibrium level
and i, will be found.
If the compensated nationalization is done through the issue of
bonds, then even the bb curve might move upward to clear the excess
supply of bonds.
As can be seen from Figure 111.2, the effects on the
price of capital, Pk' would not change.
But, an increase rather than
a decrease in the interest rate is now likely to appear.
The complete model - statics
Equation (III.11), together with two equations from (111.12)
(111.15), forms a complete static model in the space Pk'Pm i.
-
1.3.
The stock
variables are given and the government propensity to invest, h, still
follows condition (11.12).
As noted previously, the consumption market clearing equation
134
Fig.III.4
a a11
Pkl
aa
p*
t
cCc
p
p
mml
135
can be shown in the space Pk'pm as a decreasing relation meeting an
upward asset clearing equation.
See Figure III.3.
Therefore, the experiments of increasing the government share of
capital,
, and its propensity to invest, h, move both schedules upward.
If the two countries agree on pegging the price of money, as they should
if a fixed rate of exchange, E, is given by the relation.
PM I = E E
p
then, either economy, I, managing a and h, has to adjust its own fiscal
and monetary policy, or
both have to negotiate again.
an increase in the price of capital has to be accepted.
In any case,
If this does not
happen, the schedule might move back to its original position.
A simple
conteracting fiscal monetary mix will allow the government share of
capital to increase.
This will lead to the redistribution of reserves
through a tighter monetary policy, and to lower private wealth through
a tighter fiscal policy.
1.4.
The balance of payments
In this model, the balance of payments conditions are derived as
a simple identity.
The peculiar feature to note here is that as long as
the model overlooks the problem of capital location and does not distinguish between the purchasing of physical assets and equities, the
flows related to investments goods may represent trade as well as capital
movements.
136
[pkqI (k7, pk) - he - pkt (k, i) ]
TRANSFERS
[r(k
TI
G
I
I
- kR - kR ) + i(b - b)]
net interests
net profits
CAPITAL MOVEMENTS
[pm6I + nb 1 )
RESERVE MOVEMENTS
[z]
O
1.5.
+
(1-s )yI]
+
(1-h)e -
[qc (k' Pk) -
TRADE
-
pmE(bE + nbE)]
+
111.19)
+
For economy, I, the balance of payments would then be:
as an accounting identity
=
The complete model - dynamics
We already noted the problem of defining
law of accumulation.
a residential capital
Both countries' investment demands are, however,
completely indifferent between locations E and I.
At the world level, the additions to the stock of capital are
given by the total production of investment goods.
level of capital accumulation is:
III.
20)
kw
=
qI(kwp k) - nkw
while the private capital dynamic condition is:
111.21)
Op - q1 (kw,
k) -
and government capital in I is:
(he/pk) - nk
Therefore, the world
137
111.22)
where:
iW = kp
kG = (he/pk - nkG
+ kG
Equations (111.20) or (111.21) directs the growth of capital stock
toward its steady state solution.
The other dynamic rules that the economies have to follow concern
wealth accumulation:
111.23)
SE
E
a = sEYE - na
111.24)
'
111.25)
*T
TI
'G
pk - dpm + nbpm + nm IPmk -g
a = he - nk
- na
*
= syIy
Equations (111.24) and (111.25) have to add up to:
111.26)
-TI
-G
-I
a +a
=a
Equations (111.20), (111.23) and (111.24) completely define the
dynamics of our two-country-two-sector system.
The equilibrium in the world consumption market, given a pk*
determined by the assets market, is given by:
qc(kw, pk*) =(1-sE)E + (1-s1 )y
+ (1-h)e
(1-sE)[w(pk*) + r(pk*)kE + ibE P- TE]
(1-si)[w(pk*) + r(k*) (-)kTI
+ (1-h)e
=
+
111.27)
+ ib pM - TI - rSkTI
138
where:
111.27')
T
E
I
I
E
= t Pm
and
= tipm
T
Within this framework, economy, E, can only adjust the tax level
and its propensity to
,
*
TE, while economy, I, can move the tax level, T
invest, h.
If (he) is considered given, then to enforce a given pm
related burden split through TE and T
.
the fiscal policy of the two countries has to be coordinated, and the
Now, relation (111.27) can be rewritten as:
111.28)
) + (1-h)e
(sE-l)tE + (s1 -1)(tI +
(1/pm )qc (kw,
-
+ ibEp ]
The definition of
a
k*) -
1-sE
=
[w(pk*) + r(pk*)kE
(1-s )[w(pk*) + r(p k*)kTI + ib Ip]
E
I
implies one restriction on t
,
t
,
h.
But
this restriction is not sufficient to fix all three values.
The splitting of the burden, cx, between economy, E, and I, may
then be represented by the variable p so that:
111.29)
(a)
(sE-l)tE
=
Pa
TI
(b)
(s
-
1)(t I +
I
r(pk*)kI
PM
) + (1-h)e = (1-y)a
139
From 111.29) the instrumental use of government investments within economy, I, is then clear.
The fiscal tools "e" and "t", and the
investment propensity "h" can be managed within any given share of the
burden,
a.
This finding may be of interest to international economic agencies.
Quite often, the IMF, the EEC or similar organizations relate the availability of BOP deficit finance to given conditions of domestic fiscal
and monetary policy.
Relation (111.29) shows that such lines might be
incorrect in particular cases.
The final destination of the financing
should also be taken into account.
In fact, for a given amount of govern-
ment expenditure, the more it comes from corporate investments, the lower
is the need for tax revenue, i.e. the more willing should international
agencies be to allow a government deficit.
As we shall see later, this result is due to the effect of government investments on the world rate of accumulation, i.e. government investments contribute to the increase in the world wealth frontier.
Reconsidering our formal analysis, (111.27) can be substituted:
either:
q (,
Pk
m + (1-sE)(w + rkE + ibp ) + (1-sI)y
+ (1-h)e
(1-sI)y1
= (1-P)qc + p(l-s1 )(w
(1P)
and therefore:
111.30)
(1-s E)(w + rkE + ibE M) -
+ rk
(1-h)e
+ ib PM
-
140
or:
qc =
-sE) yE + (1-)p
M + (1-s )(w + rkI + ib'PM)
Then:
(1-sE
c + (1-P)(1-sE)(w + rkE + ibE PM) - p(1-s1
=
)
111.31)
(w + rk
+ ib pM)
If we now set
111.32)
P = (1-sE)(l-VO(w + rkE + ibEPM) - P(-s 1 )(w + rk
+ ib p
111.33)
y, = [(1-p)q
111.34)
yE
(qc
=
+ P)
P -
-
/
(1-h)e] /
(1-s
)
we can obtain:
-sE
The full dynamic system can therefore be rearranged in terms of total
(private plus government) flows as:
111.20)
0w = qI(kw, Pk) - nkw
111.35)
-TE
a
111.36)
TI
a
=
[sTE
E / (1-sE ] [pq
s
+ P
/, (1s )][(1-p)q
Ic
-
- na
]
. e(s I-h)
~
s
1-SI
TI
-
naI
141
While private wealth accumulation follows:
-E
111.37)
a
= [s(E
111.38)
a
= [sI /
c + P] - na
E
E
(1-h)e] - na
(1-s)] [(l-p)qc - P -
Once the price of capital is given, the world accumulation of physical
assets is completely determined.
As we shall see, however, the manage-
ment of the government propensity to invest can lead the two countries
In this case, the steady state capital intensity
to agree on a higher Pk.
will be higher, and, consequently, the world wealth will be increased.
The problems of wealth and income distribution, have already
been investigated in the full private economy.8
Here we explore how
government investments play a role in such distributions.
If we set ATE _
TI = 0, solve (111.35) and substitute it into
(111.36), we can easily verify that:
111.39)
q
-
c
I
sI
= n [aTE
s
aTI
E
-s
sI
which shows the wealth distribution frontier between country, E and I.
It is interesting to note that the entire frontier expands or contracts
according to:
111.40)
h
<
s
Indeed, if the two governments agree on a given pk, the steady
sri
state intensity of world capital is determined at k.Hence, the
142
production of consumption goods is given.
However, in such a situation,
the accumulation process in I can be increased through governments investment programs.
The slope of the frontier is still dependent on the relative
propensity to save in the two countries.
Figure 111.4 shows graphically
how the system behaves.
Consider AA as the case given by s1 = h, i.e. the wealth frontier
where government investments do not alter wealth accumulation.
refers to the case
h > s,, and BB to
Then CC
h < s,.
It seems appropriate here to investigate more deeply the role of
the government propensity to invest, h.
As far as total wealth (government plus private), is concerned,
it should be clear that the government propensity to invest maximizes
world wealth once it reaches unity. In such a case, the frontier reaches
its maximum, ceteris paribus, including fiscal and monetary policy.
situation is met at DD.
This
On the other hand, if a minimum is reached at
EE, the world economy has to bear the brunt of government expenditure
"e", allocated in full to consumption.
At the maximum "h", the
steady state solution for the government share of capital is given by
condition (11.12) as:
e
111.41)
=
O
pkcp
+ e
which shows that the private demand for investment goods plays the major
role.
Indeed,
can approach either zero or one according to
I
approaching infinity or zero, i.e. a "mixed" economy can make its way
143
Fig.III. 4
aTE
e (s -h)
D
c
s
E
(1-sE )n
[q
s
C
A 4
B
El
e (s -h)
C
E
B
A
C
s1
D
sI
(1-s
)n
TI
144
back to a purely competitive private economy or converge toward a fully
centralized economy according to the private behavior of investment
goods.
Once h approaches unity, then only the standard fiscal tools
As we saw for the closed economy case, a trade-off
remain to be used.
between inflation and private capital intensity then appears.
Moreover,
for the large open economy, the other country has to be involved and the
result of the new bargaining is uncertain.
In the simple model to which we refer, per capita consumption is
proven to be linearly dependent on per capita private wealth once a
steady state is reached.
111.42)
Indeed, if A
_I
(a)
0 = syE - naE
(b)
O = syI - na
(a)
cE = (1-sE) na
/ sE
(b)
c, = (1-s
/sI
=
0, then;
(b)
YE
(c)
y=
=
naE /
E
I
I
na
/sI
then:
111.43)
) na
Beside the total wealth, it is also interesting to investigate the priAs we did before to obtain (111.39), we may con-
vate wealth frontier.
sider (111.37) -
(111.44)
(111.38), and obtain:
-
q
c
+ aI
(1-h)e = n [ a
sE
sI
145
which shows that any government expenditure reduces the world private
But the higher is h, the smaller is such a reduction,
wealth frontier.
and it would disappear for a unitary government propensity to invest.
Indeed, any government expenditure, financed by taxes, reduces private
disposable income.
Therefore, the main parameters are the increased
total wealth in the world and the effects on the private sector in
both countries.
An important issue that still remains to be discussed is the role
of the allocation of burden between the two countries.
We may ask which
sign would have to be taken by:
E
Da
/ ay
a' / ap
and
for any given value of h.
From (111.37) we have aE in steady state, then:
(111.45)
3aE
/
=
(sE/n(l-sE))pm*a > 0
as a Z 0
which is the same result obtained by Foley-Sidrausky for a purely private
economy.
A further interesting approach is to enquire into the effects of
movements in h and, consequently, in the steady state government share
of capital.
(III.29a).
There are several cases.
We might consider WK
Hence, the effects of an increased
by other parameters in (III.29b).
(111.29')
R = e - nSpkkTI -
constant in
need to be outweighed
From:
(1-sI)t
-
(1-s)(rkTI
)
=
(1-P)
146
we must obtain:
+ aR/at
aR/3
(111.46)
aR/De
+
0
=
which represents the constraint on government corporations investment
programs if no new international agreements are sought.
However, a constant value of the product, pa, can be obtained
only by adjusting p with respect to a change if any in a (due to the
increased government propensity to invest), or by taking P as constant
a
and outweighing in
the effects of the increased h.
From (111.28) we
know that:
PM
I
E
or in steady state:
111.47)
E
a
(h-sE)
=
I
+ (1-s 1 )(t
r~kTI
+
TI
)
-
e + pkek
hence:
aa/a
(1-s)(rkTI/p) + p kTI = 0
=
and
pTI
=
Pm / (1-s
)
(111.48)
where:
then:
TI
p
=
DaTE
r(pk)
.
_
Therefore, if 1 and a are both constant,
aE / a
= 0
147
and the total increase in the wealth frontier will be taken up by
country I.
We have just shown how a movement in the government share of
capital increases the wealth of the entire economy, but, under particular
hypotheses.
All this increase can be directed to one country.
The main
parameters of the analysis are given by the private propensity to save,
the private demand for investment and the government propensity to invest.
We know
We can now express this analysis in graphical terms.
that:
(111.49)
which shows that a
(111.50)
= aTI - pk kTI + Pm(bI + mI)
a
I
TI
= a
if:
= pm(bI + mI)
pk k
but, since in steady state:
TI
he = pkk
and
(111.51)
d = npm(bI + mI)
=
ng
we also have condition (111.50) as:
111.52)
he
=
d
Therefore, in Figure 111.4, we can add relation (111.49) and obtain
Figure 111.5, where the wealth frontiers for the case of h=0 and h=l
are reported as line EE and DD.
If condition (111.52) holds, a 45 degree
line represents the relation between total and private wealth in economy
I.
Therefore,
if:
h =0, then6=0
and
I
a
=a
TI
+ p (b + m) =a
TI
+ gpm
148
Fig.III.5
I'll
Is I'
'4'
C CL)
hA.
K
N
lo1%,op,
b
14
(k)
(P)
&l
7.'
149
Then, the line given by (gpM*)-F will be the new private wealth relation.
On the other hand, if:
e
h=l,
and
a
I
then
=
kTI
TI
= a
-
(e/n) + gpm
Now solutions along H'H' in panel (a) will lead to solutions HH
in panel (b).
The form of this line is determined by the relation be-
tween the effect of the increased wealth frontier and the upward shift
on the relation between private and total wealth in panel (b).
due to an increased government propensity to invest.
HSJH to be the solution.
Consider line
Now several targets may be pursued, each of
them depending on the appropriate choice of h.
to maximize private wealth, then h
be reached in panel (b).
Both are
For instance, if we aim
has to be chosen, and
point S
will
If total wealth is instead to be maximized
with respect to a non-diminishing private wealth constraint, then h2
will be the new frontier, and J will be the solution in panel (b).
For the sake of simplicity, we introduce,
need to be clarified.
sE=s 1
two assumptions which
First, we draw Figure 111.5 for the case of
i.e. a 45 degree wealth frontier was considered.
If sE>sI then
the frontier is steeper, and given the same initial wealth distribution
in H', there will be far fewer possibilities to increase wealth in country I. Second, we assumed that economy I counteracted perfectly the effects of a movement in h and
ed, i.e. line H'H' is followed.
in order to leave the product ya unchangSuch a hypothesis can not necessarily
be met. Country E can always ask to rearrange the allocation of the bur-
150
den trying to move along line
H'H". In this case, country E takes full
advantage of government investment programs carried out by country I.
2.
The Case of a Small Open Economy
Within the framework of a large open economy, the management of
government corporations has been shown to represent an interesting
additional tool for economic policy.
Conditions leading to the sharing
of the effects of government investment programs within a two country
world have also been explored.
We now turn to the case of a single economy whose size is too
small to influence the rest of the world.
It operates within the inter-
national markets, and to some extent it has to accept world parameter
conditions.
Several cases of fiscal and monetary policy in a small economy
have been proposed.
Some authors have emphasized trade; some capital
movements; some have referred to a barter economy; some have introduced
money and physical assets.
The existing literature is fairly broad.
We need therefore only to reorganize a small open economy model to
introduce the case for government investments, and to focus on the
possibilities and limitations of such programs.
2.1.
The assets market
The three assets world we refer to for the case of a closed economy needs to be slightly modified.
We consider both domestic money and
physical capital to be owned by residents.
Only bonds are traded inter-
nationally, on the assumption that they are of short term maturity.
151
Therefore, we consider four different assets to exist in such a world:
foreign bonds, money, domestic bonds and physical capital.
They are all
supposed to be imperfect substitutes, so that their onw returns, although
related to each other, do not necessarily equalize.
Hence, assets
Supply and demand conditions are as before.
market equilibrium conditions are:
111.53)
Money-
(g/x)p
+ fFi-R = L {[ kT
k
m+H)pm + b f
+ ib R
(qc +
p
(T +i);
m
(+-);
-
rp
R
Bonds -
111.55)
Physical Capital -
=
H{-} + F{i -
(-
R
( + R
Pk
)
(1-1/x)gpm
111.54)
e + (d+Tr )p
T
PkkT
where:
R = p /pw = rate of exchange
m
m
Af
= 0 under the fixed exchange rate case
b
= foreign bonds owned by residents
i
= international interest rate
pw = world level of price
m
H
= demand of domestic bonds by residents
TH = Total demand of bonds by residents
FB = demand of foreign bonds by residents
=
TH - FB
+ I)}
k
R];
7
152
= demand for domestic bonds by foreigners
F
bd = domestic bonds owned by residents
b
= foreign bonds owned by residents
b
= domestic bonds owned by foreigners
FR = international reserves
NI = national income
=
[qc +qIk + i b R-ib f]
c
p =
1k
i + R/R
At any given moment,
national wealth is allocated fully to the
four assets, and the following constraint is met:
111.56)
a = L + H + FM + J = KT (1- ) + (m+b)p + b R
Gross substitution hypothesis allows us to verify the following derivative signs.
See Figure III.5a.
Under a fixed exchange rate system, based on purchasing power
parity, we have the internal price of money, pm, fixed by:
111.57 )
Pm
pmwR
The accumulation of foreign reserves is endogenous and, by
entering (111.53), it makes the money supply an endogenous variable.
Therefore, by using (111.56), we can express the assets market
by two independent equations in Pk, i, FR.
From equilibrium conditions,
we can derive:
111.58)
Pk
=
q(y, kT
Tr M, Tr k, x, i, R)
153
1>3L/3ac>O
1>aJ/aa>O
1
L /p
DH /pm<0
3H /apb>0
H /ap <0
@FB/Dp<0
aFB/pb<0
aFB/aP>O
3L /p
3H /aNI<0
aFB/aNI<O
UJ /aNI<0
0
>0
aL /pb
3L /aNI>O
J/p-
b0
0
3F /3. >0
3F /R
<0
Figure III.5a
<0
L /p
aH /3pk-
aFB/apk<O
f- <0 a
0
0
154
Fig.III.6
k
kk
k1k
p*
k
Pkl
rtm
m 1m
i*i
155
111.59)
i
=
$(y,
T-
k ,
m'
k,, x, i, R)
where all the signs of the derivative previously proposed still remain
valid, and:
apk/aR < 0
and
@i/3R < 0
depending on whether wealth and
income effects are smaller than the effects
due to (i + R/R) and FR
Following our previous analysis, we can prove this condition in
the pki space.
Let us indicate KK and mm as the capital and money market equilibrium conditions leading to an equilibrium level at pk* and i*, in
Figure 111.6.
Now, an increase in R moves both schedules down, since
wealth and income effects create excess supply in the capital and money
markets.
Hence, the price of capital has necessarily to move down.
The domestic interest rate can move both ways, up or down.
2.2.
Flow demand and supply conditions
The government budget constraint can here be resumed unchanged:
T + rKT+ p d = pmbpm + e
On the other hand, the private sector identity needs to be modified to
include flows of interests on foreign bonds and domestic bonds owned by
foreigners:
111.60)
rKT(1- ) - T + ibd m + ib R = qc
Ik
- ib R - e + dpm
156
The goods market refer to both consumption and investments.
Supply is clearly due to domestic production and imports as:
+ m Ic
q
111.61)
-
(1-h)e = Cd
{[(1-)KTPk + (m+H)p
+ (1-s)
III.61a)
q IpK +m
IM
-
he = I(r,p
+ b R]}
[q + (d+ m g)p m - e + ib R) + I
i)
where:
are respectively the proportion of consumption and
(m+M 1) = 1
9
of investment with respect to net imports
Private demand for investment goods is here related to technology, r.
Now, ruling out wealth from the consumption demand, flow equilibrium requires that:
qc + (1-mI)IM -
(1-h)e + q1 pk + mIIM - he = (1-s)[q + (d+
mg)p
- f
- e + ib R] + I
which can be expressed in the usual form, in which private and government
savings equate investment and balance of trade deficit:
III.62)
I
-
IM
=
s(q + (d+7Tg)p
-
-f
e + ib R)
-
(d+'Trg)p
Therefore, we have pk and i being determined by the two independent
assets market relations.
Hence, the third unknown FR is given by the
consumption market equilibrium condition.
This makes the net flow of
157
imports an endogenous variable which fills the target of a BOP balance.
2.3.
Balance of payments
Trade deficit in the BOP is given by:
111.63)
IM(NI ,R)
=
tr
Dtr/aNI < 0
atr/ R > 0
with:
Transfer payments surplus is:
111.64)
- f
st = ib R - i[(1-l/x)gpm - H]
or:
with:
st
=
st(i,i,R,R,NITr
9st/ i
>
0'
9st/9NI < 0
Ik,r(pk)/pk)
st/3r > 0
st/Di < 0
st/Dff
m
<
0
st/31[
k
< 0
st/DR < 0
st/p k> 0
The capital movement deficit is:
111.65)
cb = DTH - D[(1-1/x)gp m] + DF
d
Hence, the total surplus is
111.66)
BOP = st -
cb - IM = FR
Now we can show that:
cb/Df
but, since
3st/3
< 0
< 0,
the initial effect of an uncompensated national-
ization would reduce the BOP deficit, but the long run effect might
158
increase it.10
The total effect would be given by:
(Dcb /
a ) -
(9st / 3S)
The complete model
2.4.
In the previous sections, we presented a complete model for a
small open economy, where the government operates within competitive
markets.
The complete model can be reassumed as:
111.53*)
I(i,r,pk) - nk
(a)
k
(c)
kT
-T
k = I(i) +he -nk
=
g = d
111.54*)
(b)
kG = he
nkG
ng
-
111.55*)
111.56*)
d
111.57*)
q+ (l-m)IM(q
1II. 58*)
7r
111.61*)
FR -tr + st
m
,R)
III.59*)~
= 0
-
Ch
-
(l-h)e
=
d
C (a) + (1-s)NI
111.60*)
k = 0
111.62*)
e = e*
Pm
pmE
=
T
II1.63*) k
=
k + kG
T
Under a fixed exchange rate system, R = 0, then, given R,e,h,kT
f
,y,b ,s,mc7Tm'lTk ,x,i,
exogenously, we remain with three equations with
the three unknowns, pk,i,iR.
159
If we instead refer to a flexible exchange rate system, we have:
iR = 0
and the rate of exchange becomes an endogenous variable.
Now, in steady state, the flow of international reserves has to
be equal to zero.
111.67)
Therefore, we have from (111.60) that:
IM = st - cb
We can substitute (111.67) into (111.56) and solve it for d,
which can be substituted into (111.54):
=
111.54)
- (1-s)g + (1-s)e - ng q
c +(1-mI) (st - cb) - (1-h)e
(1-s)pm
Therefore,
space g,k.
(III. 68)) and (111.53) form a complete dynamic system in the
The slope of the two relations can be proven as follows:
(+ -)
@
Di+
111.68)
-=
k=0
_
(-)
aI
i
3I
@I
ar
(+ -)
+ aI
3R
t
-a+P '-TL.
k
ai
3G
(+)
k
r
P4, + 3I
2
apk ag
ap kag
(+)
(-)
- n
160
Therefore:
<
0
according to the different combinations we
k = 0
may have on (111.67)
(+ -)
Dk
ast
)
(1-r
_
DK
-
111.69)
ast
(1-M)
3g0
(-)
-
(-)
cb
K
3cb
-n
(-)
39
> 0 if ast > 0 and C>
aK
ag
n
(1-m
ast
Tg
)
hence:
or:
k
0
g=0
<0
if
a)
ast > 0 and acb > ast
0K ag
3g
~
b) ast < 0
K
n
(1-m)
-
>
K
-
3K
'ag
> Dst
ag
n
(1-mI)
The crucial relation to determine the slope of (111.69) is then shown to
be the relative size of the effects of k and g on the transfer payment
and capital flows components of the BOP.
The larger the effect on the
capital flow, the more likely is the g=0 schedule to be upward sloping.
Therefore, even if we assume a positive slope for k=0, several solutions
161.
Fig.III.7
panel (a)
-
.,44*
>'1
k;,
(b)
0
~: 0
~LQ
'A
0
o~ ~
0
4)
2
f(:O
162
on the g,K space can be met.
Obviously the conditions of a stable
steady state equilibrium cannot always be found.
In Figure 111.7, we
show two cases of stability, panels (a) and (b), and two cases of instability, panels (c) and (d).
For the sake of simplicity, we consider the
case of an increasing k=O schedule and a decreasing g=O schedule, as in
Figure 111.7, panel (a).
2.5.
Government investments as a policy tool for a small open
economy
In this section we analyze the effects due to an uncompensated
or a compensated nationalization, i.e. an increase in
followed or not
by an increase in h.
Once
is increased, an increase in pk will follow while there is
an uncertain result for i.
If the interest rate increases, we are
assured that investment will decline; hence, a k<O will appear, and the
k=O schedule has to move upward at some (k=O) .
(See Figure 111.8)
On the g=O schedule, the impact of an increase in
ast/a
and
acb/
.
depends on
As we have shown before, the initial effect is
an increase of the BOP surplus, i.e. an upward shift of the g=0 schedule
is needed.
The final result is then an increased intensity of private
capital, k, as shown by (g=0)I and (k=0) .
However, if the long run
effect is considered, then the final position of the g=O schedule will
depend on:
aeb/
- ast/M3
163
Fig. III.
8
g
(k=O)
k=O
(g=O)
1
g*=
92O*
92I
g=o
(g=0 ) 2
k*
k
k
164
We can then refer to a situation like (g=0)2 , in which both the private
intensity of capital and the government debt decrease.
On the other hand, if an increase in
is followed by an increase
in h, the movement of k=O will not be affected, but the case of a g>O
will be more likely.
Therefore, an increased intensity of private capi-
tal may more easily be obtained, i.e.
(g=0) 1 is more likely.
This result brings us back to the issue that a government investment program may make an additional contribution to the accumulation of
physical capital, without completely crowding out private capital.
This
result can be obtained only if the government propensity to save out of
its expenditure can and actually is adjusted coherently.
165
Chapter IV - "THE"OPTIMAL GROWTH PATH FOR THE ECONOMY AND OPTIMAL
POLICIES FOR GOVERNMENT INVESTMENTS
Several studies
have shown that efficient government management
of demand can lead the economy toward a given steady state growth path.
Our own results confirm those findings.
However, it is also known that
perfect demand management through fiscal and monetary tools is not always practicable.
Hence, government corporations can be assigned
appropriate targets.
We have already shown that "room" for government
investment programs can be made available only by coordinating it with
monetary and fiscal policies.
Without coordination, either the growth
path converges back to a purely competitive economy, or alternatively,
the government assumes full ownership of the capital stock.
Thus far, we have not compared the different alternatives with
respect to welfare parameters.
It is always difficult to compare social
and private benefits and costs of different target functions.
In fact,
"social efficiency" is still a very broad and inadequately defined concept.
Thus, we limit our analysis here to the possibilities open to
government corporations for pursuing different growth paths, where
purely competitive market conditions are not consistent with optimal
growth.
166
1.
Optimal Growth Path for a Mixed Economy
The social welfare function is a hotly debated issue.
Neverthe-
less, we will here review some fairly well-known results.
Let us assume consumption is the final target for the society.
Intermediate targets may, and actually must, include capital accumulation
left over from one period to another.
Government social welfare functions will, therefore, refer to per
capita total consumption,2 and it might be expressed as the sum of its
utility over either a finite or an infinite time span:
IV.1)
W
=
U(q (T))e -6dT
f
c
where we assume, for the sake of simplicity that U is a C.E.S. function,
such that U' > 0 and U" < 0.
We also allow a positive social discount
rate, 6, and overlook the population weight debate which might well enter
3
the value of 6 itself .
Our standard laws of capital accumulation remain as:
(IV. 2)
a)
b)
k
k
= q
T
--
q1 (kT, pk
=
- -nkG
Pk
c) i G
-nk
-
he
-
nk
Initial conditions in the stock of capital are also given as:
(IV.3)
kT (0) = kT
0
k(0) = k
kG (0) = kG
0
Then, we restore the assumption of the government stabilizing the price
of money through fiscal and monetary tools.
167
Therefore, the problem is reduced to working out the levels of
the price of capital which will lead, through (IV.2) to a growth path
maximizing (IV.1).
To find such an optimal path, an empirical method is used.
Let us consider the case in which one unit of current consumption
is given up to increase investments which will allow higher consumption
frontiers in the future.
The loss of utility due to the loss of one unit of consumption is:
(IV.4)
U'[q c(k T(t) , pk(t))]
Now, since factor payments are always equal to the value of output, we
have:
(IV.5)
w(pk) + r(pk)k + r(pk)kG
qc(kT
k) + PkqI(kT
k)
then:
(IV.6)
qc(kT
w(pk) + r(pk)k
T
Because of the unit increase in k
,
- Pkq 1 (kT2k)
a higher production of investment
goods is needed to maintain the new level of capital.
Hence, the conT.
sumption we have, in the future, for a unit increase in k
(IV.7)
Oqc/akT
=
r(pk) - npk
and the increase in welfare is:
(IV.8)
( 1 /pk)
f
[r(T) - npk (T)] U' [q(T)] e-6 (T-t)dT
is:
168
Therefore, along this growth path we have to verify that:
(IV.9)
OC
t [r(T) - nPk
=('/Pk
U'(qC(t))
)]
-(T-t)
e-
U' [qc(T)
dT
Time differentiation of (IV.9) will lead us to:
(IV.10)
-U"qC
-(lip 1 ) [[r(t) - npk(t)] U' [qc(T)]c
f[r( T)
t
-
U?
npk(T)] U'
-
[-
pk
(q-(T)] e6(T-t) dT
Then, by using (IV.9)
Ulqc
[(l/pk)(r(t)
- npk(t))
-
kk))
(-
] U'
or:
(IV.ll)
[where:
[ (r(pk))/Pk + Pk/ k ]
-
n + 6 + a qc
c
a = -U"qc /U' = elasticity of marginal utility of consumption]
-This is the standard result which states the rule that the optimal rental price of capital is given by the rate of growth of population, plus
the social discount rate, plus the rate of change in marginal utility.
The last term clearly disappears in the steady state solution.
Further,
if 6 tends to zero, the golden rule is also approached.
Since private and government capital productivity are here considered to be equal, i.e. no differential enters the utility function,
such a general rule applies regardless of ownership of capital.
Under the constraint that the government aims to maintain its
own share of capital by adjusting its propensity to save, equation IV.2b
169
becomes:
k
(IV.2b')
=
(l-6)q 1
-
nk
which, together with (IV.11) forms a complete dynamic system in the k,pk
space.
As is well known, such conditions are necessary but not suffi-
cient, because several non optimal paths may satisfy them.
Therefore,
given initial conditions in the stock of capital, we need to look for
"the" optimal values of pk* which will tell us "the" optimal path.
As in the very first sections of this study, the k,pk space
takes the form shown in Figure I.1, where dotted lines Pk and Pk
re-
present the limits of non-specialization areas and the initial condition
corresponds to (-)k 0
The k=0 schedule, is upward sloping in the k,pk space.
schedule, referred to in (IV.ll) is also upward sloping.
The pk=0
Further, we
may note that when both are zero in steady state, we have from (IV.ll):
(IV.1l')
r(pk)
k
=
n + 6
and
(IV.2")
(1-S)qI (kT,
k
=
nk
Therefore, there is only one level of pk which can satisfy (IV.1l').
Then, such a level of Pk can be substituted into (IV.2"), which can now
be solved for k.
This proves that there is only one intersecting point,
actually a tangent one, between the two dynamic schedules, as presented
in Figure IV.l.
170
k
Io
k
A
-/Pk
kT'
k*
Fig. IV .1
k-(-f)k TT
171
What is now left to be proved is the uniqueness
path, i.e. the path B in Figure IV.l.
case of k<k*.
of the optimal
Let us confine ourselves to the
Clearly, if the initial pk is kept higher than pk*, then
the price of capital will always increase and a path like A will occur.
On the other hand, if the initial price of capital is taken at some
level below the k=0 curve, then it will decrease, with k increasing, until the pk=0 schedule is traversed.
decrease, as shown in C.
After that point, both Pk and k will
Therefore, there must be an initial level of
pk, above the k=O schedule, for which the price and the intensity of
capital will increase.
When pk reaches pk*,
at the same time k reaches
k*.
The value of the price of capital is below pk* along the optimal
Thus, we have the condition:
path B.
r(pk) / Pk > 6 + n
Further,
k<k*.
we may not that k always increases along such a path, since
Hence, the production of consumption goods always increases along
the optimal path.
Exactly the opposite case is met if we start from
k>k*.
2.
Optimal Fiscal and Monetary Policy
Within our closed economy framework, two targets must be met:
a
constant price of money pm*, and a level of the price
of capital, Pk'
such that the latter leads the system toward "the" optimal path.
If we assign fiscal policy to control the equilibrium condition
172
in the goods market, we have to ensure that:
(IV.12)
q (kT'k)
- (1-h)e = (1-s)(qc + pkq + dpm*e)
where we exclude wealth effects on the consumption function, and we consider
(IV.13)
where:
7Tk =
7m = 0.
Now, solving (IV.12) by d, we find:
d = [sqc - e(s-h) - (1-s)qIpk] /
ad /k
>
0
ad /e
<
0
if s > h
d /De
>
0
if s < h
ad /ah
>
0
[(l-s)pm
6d/6pk <
0
The relation between the government deficit and debt is still
g
=
d - ng.
Hence:
(IV.14)
g = d(kT'
k, e, h) - ng
Therefore, if we consider h as given by (11.12) and
S
5 fixed at any level,
, and if we use traditional deficit policy to control the consumption
goods market, we find the optimal solution in terms of the dynamic relations of government debt and capital accumulation.
T
In the g,k
space, we have a vertical line representing the locus
of points in which k
=
0, while the g=0 schedule may have different
paths, not necessarily limited to positive values of government debt.
Given the arrows pictured in Figure IV.2,
it is easy to verify that an
173
Fig. IV.2
k
-k
174
optimal path is available, and that the steady state solution for g is a
stable one.
At this point, monetary policy can be used to fix the level of
the price of capital which leads to the optimal welfare solution, i.e.
in the asset market relation:
(gpm*, k, 6, Tm'
Pk
k' X)
the debt/money ratio "x" has to be adjusted to maintain the optimal path
for Pk'
Within this closed economy framework, we have more tools than targets.
Indeed, we can manage the deficit, d, the government propensity to
invest, h, and the debt/money ratio, x, to fix pm at pm*
along the optimal path.
,
and move Pk
Such an excess of tools may, however, be avoided
if an additional target is given for the economy.
As we shall see in the
next section, a foreign account balance may be introduced into the analysis.
But, let us now consider that some rigidity fixes the government
expenditure at a level e*.
used.
Traditional fiscal policy can no longer be
The government propensity to invest and its share of capital have
to be used to balance the consumption goods relation.
deficit is instead moved to keep g
model under such assumptions is:
= he/pk - nk
(b) kG = (IV.1)
he/pk - nkG
(a)
(c)
2)
q
T =i + kG
g = d - ng
=
0 in steady state.
The government
The complete
175
3)
pk
4)
i =
5)
qc (kT'
=
$(y,
, Tr k9 Tm' x)
k,
$ (y, k,
, 7Tk9 TrMx)
k) - (1-h)e
=
Cd [(l)
kgpm] + (1-s) [q+(d+Trmg)p m
-
6)
Fm = 0
9)
Pk = Pk*
12)
k
7)
10)
Tk =0
e =e*
8
11)
pm
e +
kpkk]
PM
d =d*
= k + kG
Where monetary policy in (IV.3) and (IV.4) moves Pk along the
* and/or h* lead toward the optimal k* through
optimal values, and
(IV.5).
Since all else is given, we can represent the cc and k=0
dynamic schedules in the
,pk space.
Once we accept condition (11.12),
it is possible to verify that:
(IV.12)
3/ 3k
-(3q
cc
+ (ac dfa)
/akT)(DkT/ k) - (Dq /3kT)(Dk T/k) p*
-
q p
,I
/ e* +
k+
(acd /3a)kTp*
>
176
provided either:
(aqC/kT)
[(3q /kT) (k T/3k)
k T/3k) <
p* + (3cd /a)
k
d
and
(3c d/3z) k p*
that is:
pI
>
qp* / e*
>
(+) / (+)
0
or, both numerator and denominator in (IV.12) are negative:
(-) / (-) > 0
A negative slope applies to the i=O schedule since:
(IV.13)
[(-qI) / (q)/(3kT
3/k=0
- n)] <
0
(-)
Where the
i=0 schedule crosses the
axis, the government share of
capital is one, while at the point it crosses the k axis, no capital is
owned by the government.
Now, the dynamic equilibrium condition depends on the position of
the cc schedule.
Indeed, as we show in Figure IV.3, there is no certain-
ty that it will cross the k=0 schedule within the range of values 0-1
for 6.
Some consumption market equilibrium relation could be at c2 c2 , or
even above it.
In this case, the consumption market will always be in
an excess demand condition, i.e. the level of government expenditure is
so high that it takes the whole production of investment goods, and a
share of consumption goods which leaves private demand unsatisfied.
Therefore, the total government expenditure "e" must be reduced.-
177
Fig. IV.3
C2C2
excess supply
CC
excess demand
0
k>O
excess supply
excessidemand
c00
C C
k*
T-)
178
The opposite case is met with the c1 c
of government expenditure is too low to keep
that the value of
schedule, i.e. the level
5 positive.
Note, finally,
5 is not always directly related to that of h.
Indeed,
the level of per capita government expenditure has to be considered, too.
From (11.12) we may note that when the government takes over investment
goods production, i.e.
level of e.
5 + 1, its propensity to invest is given by the
Thus:
q p=
he
h = qpk/e
or
However, the equilibrium relation for the consumption goods market, by
a once and for all jump in government expenditure, may be located at
some cc.
Then an optimal path for both S and h is determined, and the
5*, k* and kT*
steady state solution at
Once the values of
=
k*/l-*
is also a stable one.
5* and k* are found, equation (IV.5) is left
only with the monetary variable, x, to support the optimal
path for Pk'
Several paths of
S and k can lead to an optimal steady state.
Therefore, the sign for open market operations is uncertain.
stance, in path A, both
S and k are increasing.
For in-
Since Dpk/kS > 0
and
pk/3k < 0, the increasing share of government capital tends to increase
the price of capital, while the increasing intensity of private capital
tends to decrease it.
Therefore, if the first effect prevails, pk is
increasing.
Then the value of pk, along the optimal path has to be
controlled.
Open market sales have to be performed so long as the op-
timal value of the price of capital remains above the actual level.
Alternatively, open market purchases are needed so long as it is below
it.
179
Optimal Policies for Government Investment in the Open
3.
Economy Case:
Three Targets - Three Guns
The well known debate on how to manage an open economy focuses
on the means of reaching external and internal equilibrium either
through fixed or flexible exchange rates.
.5
Modigliani
C.P. Kindleberger and F.
are associated with two opposing views.
In short, the first
author supports the idea of fixed parity, and proposes that the entire
domestic economy should be adjusted through fiscal-monetary policy, such
that no outflows of capital are produced.
The second position stresses
the point that in Kindleberger's proposal, the domestic economy, although maintaining an external and internal equilibrium, loses its power
to reach a target path for capital accumulation.
Within the CPK pres-
cription, this path, indeed, is endogenously determined.
Therefore,
Modigliani proposes a greater flexibility in exchange rates, together
with occasional use of specific taxes and incentives to modify the relative cost and return of domestic versus foreign uses and sources of
funds.
This debate can be meshed with the analysis we have presented.
Indeed, in the previous section we encountered the case of optimal fiscal
and monetary policies leading the economy toward a welfare maximizing
path, dependent on efficient management of the price of capital and of
the accumulation of physical assets, under complete price stability.
But that was the case of a closed economy.
In an open economy,
we need to consider foreign account balances as an additional target.
Therefore, through traditional fiscal and monetary policy, under a fixed
180
exchange rate, we can only fulfill two of the three targets.
Indeed, if
foreign accounts are introduced into the analysis, the price of capital
can no longer be freely managed.
market conditions.
It would be subject to international
Therefore, fiscal and monetary policy can be assign-
ed to maintain internal and external equilibrium, but, given the international price of capital, the accumulation process will be only by
chance an optimal one.
There is, however, the possibility of using government investment
as a "third" tool.
This was shown to be redundant in the closed economy
framework, but is possibly very useful in an open economy.
In line with Modigliani's position, we too focus on the possibility of maintaining external and domestic equilibrium while running an
optimal path of capital accumulation.
However, differing from his posi-
tion, we do not consider specific taxes and incentives as a means to keep
investments along the optimal path.
Instead, we analyze the role that
direct government investment might play.
Clearly, our analysis is simi-
lar to Modigliani's model in so far as additional direct government investments can be substituted by private investment, increased as a result
of incentives.
policies.
What remains is to assess the relative costs of the two
What level of incentives must be provided, or how much govern-
ment investment is needed?
In the first section of Chapter III, we analyzed the possibilities
and limits of government investment programs for a two country model of
international trade.
We argued that government investments can be plugged into such a
181
framework, but they need first to be coordinated with fiscal and monetary
policies, and second to be subject to international agreements.
When
the domestic economy grows along the optimal path under internal and external stability, what it maximizes is its own social welfare function.
There is no assurance that the other country's welfare is also maximized,
or that the other country agrees with such a policy.
Therefore, not only
does fiscal and monetary policy need to be agreed upon by the two countries, but also any kind of optimal path has to be internationally arranged.
This is mainly due to the fact that government investment demand
does not compete directly with private domestic demand for investment
goods, since imports can always satisfy both.
However, competition is
present at world market levels where the world production of investment
goods is given for any level of the price of capital.
Hence, the "world"
is affected by one country's government investment, and may react accordingly.
This is not the case for a small open economy, where investment
demand can always be satisfied by domestic production and imports.
The
latter, however, are too small to produce any reaction in the world
market or in any other country.
Let us now re-examine the previously presented small country model:
*(IV.1)
-T
g
*3)
Pk
]'i
'r
d -ng
=
=
(y, k,
, T k,
(b)
b
=k +k
k
(c)
*2)
r) - nk
, pp=
(a)
m, x, i, R)
G
he - nkG
e-n
182
*5)
*6)
*9)
$(y,
k,
(a)
qc +
(m
(b)
qI + (mI)
Tr
m
=
FR
IM (qe, R) - he
C (kT,2k)
=
e = e*
-
-
(1 - h) e
=
(1-h)
i(F-b)
*11)
k
e -
=
I (R, i,
7Tk= 0
*7)
+ +i bf R
*10)
IM(q, R) -
0
=
nk$ 7m, x, i, R)
,
+
i
)
*4)
*8)
cd(a)
pk)
pm = p
Sm
(1-s) [qe] + p kq
f
X(FR-b -cb)
=
+ (1-s)[qd]
E
- he - pkI(iP kr)
d
-IM(q ,R) +
st
+ lb
= k + kG
where, again a flexible exchange rate system removes condition (IV.8)
and substitutes it by:
(IV.8 bi)
and NDI = q
d
FR = 0
f
qc + qPk + dpm - e + lb R = national disposable income
To consider a true small economy, we assume that the price of
capital, pk, and the level of the interest rate are given.
Therefore,
the dgmestic rate of interest must be equal to the world rate, which
under a competitive market, will be equal to the world rental rate of
capital, given by the world production technology, i.e.:
i= 1 = r(pk
/k
183
Now, the domestic rental rate will be exactly equal to the interest
rate, if a non-specialized path is considered. 6
Therefore, both i and pk are given in the system (IV.1) -
(IV.ll).
Monetary policy can then manage the debt/money ratio, x, in order to have
stock equilibrium in the assets market at the world level of pk and i.
Fiscal policy manages the amount of deficit, d, keeping the balance of
payments in equilibrium.
However, as we anticipated, the accumulation
process in physical assets, once Pk is fixed, is endogenously given,
unless the government propensity to invest, "h", can be managed, or the
private investment function ,"I", can be shifted through direct taxes
or incentives.
At this point, the last step to be checked is the "optim-
al" rate of return of government investments.
Two cases may here be considered:
first, where private investment
depends only and exclusively on the world rental rate; and second, where
the function ,"I", can be influenced by government shares of capital.
Indeed, where governments enter competitive markets, they may cause a
complete shift in the private investment schedule.
This movement will
be toward decreased investment for any given level of Pk' if government
intervention is considered "harmful" in terms of expectations about
future institutional arrangements.
Alternatively, they may also increase
private investments if government intervention is considered "helpful".
In a perfectly competitive world capital market, the two cases are analogous.
A closer analysis, however, should consider what resources are
shifted from private use into government investment,
expenditures in general.
or into government
184
These resources may come from consumption and/or from savings.
But savings can be invested either in physical capital, with a return
equal to the world rental price, or in debt, either domestic or foreign.
And, so far as the interest rate equalizes rentals, any dollar of private
saving used to finance government investments, has an opportunity cost
equal to the world private rate of return.
If this rate turns out to be socially optimal, then government
investment should be evaluated by reference to this private rate.
If,
instead, there are differentials between the social marginal rate of
transformation from present to future consumption and the marginal
rate of substitution of individuals, then the question about the correct
rate of return on government investments enters the still open debate on
optimal decisions in a second-best world.
Before entering this debate, we will consider, in the following
appendix,
the case of both government consumption and investments enter-
ing the welfare functions, and the optimal policies to be pursued under
such conditions.
issue.
In Chapter V we will investigate the rate of return
185
Appendix to Chapter IV:
OPTIMAL GROWTH PATH FOR A MIXED ECONOMY WITH
BOTH CONSUMPTION AND GOVERNMENT CAPITAL ENTERING THE WELFARE FUNCTION
Government intervention in the economy in the pursuit of "social"
targets has long been, and still is, a hotly debated issue both in
theory and practice.
Many contributions have refused to attach any particular benefit
to public policy, seeing it as causing a distortive reallocation of
resources within a market system.
Under a static framework, competi-
tive equilibrium has been proved to represent a Paretian optimum solution, defined according to the original proposal of Pareto and Barone. 1
Government policy may then be called for either to guarantee the
competitive framework, to deal with the presence of "externalities" or
to meet an income distribution target.
In the first two cases the
necessary conditions on the convexity of the functions both within the
consumption and production sectors are not verified, and public policy
can be assigned the goal of filling the gap.
In the last one, the target
is completely external to Paretian lines since for "any" given income
distribution a Pareto-optimum solution can be proved to exist.
As is well known, the validity of this approach depends on the
existence of a stable competitive equilibrium.
always be met.
Such conditions can not
Some authors would rather support the idea that instab-
ility is the most general rule. 2
Further, if the Keynesian case of under-employment equilibrium is
referred to, government policy is urgently needed for the system to make
186
fuller use of its resources.
Within a dynamic framework, further argu-
ments can be made for the evaluation of public intervention in the market.
First, the ramseyan criteriQn, used in the previous chapter, be-
yond the interpersonal measuring of utility, may also refer to subjective or social parameters.
Second, an exact equivalent between dynamic
competitive equilibrium and social optimum can not be proven to exist,
nor necessarily can a competitive economy enter optimal paths spontaneously.
Placed on such a basis, fiscal and monetary policies have, by
and large, represented "the" tool for achieving long run growth targets,
and for the fine tuning of short run stabilization.
Government corpora-
tions operating in a competitive market have very seldom been used. 3
We have, however, shown that such a policy tool presents additional possibilities.
Previous chapters examined this case within a
very general economic framework.
Welfare conditions under pure con-
sumption maximization were also explored.
However, government inter-
vention in the economy may not be limited to the simple long run target
Several other parameters may, in fact, be
of consumption maximization.
considered, and government agencies may well be called upon to manage
them.
This appendix, therefore, analyzes the alternative paths that an
economy might run to maximize welfare conditions, given by a multiparameter target function.
Several combinations of private and social
targets could be of interest.
We will limit ourselves to considering
only those targets that are relevant to the role that government
187
investment might play.
First, consider government expenditure for consumption goods
entering the welfare function in a way different from per capita private
consumption.
In this case, the traditional trade off between private
and public consumption is met, within the particular framework we introduced.
Indeed, we saw how the government investment expenditure can
influence per capita steady state private consumption.
Therefore, in
our analysis, the direct impact depends on the allocation of government
expenditure to consumption and investment goods.
As long as a social
utility is granted to public consumption, the first flow directly affects welfare conditions.
On the other hand, the second flow, invest-
ments,has its impact through making available a greater amount of private consumption goods.
A further hypothesis refers to the case in
which utility is also granted to government investments, per se.
Indeed
they might be assigned particular targets resulting in the attainment of
welfare gains.
The function to be maximized would then include three
different parameters:
ernment investments.
private consumption; public consumption; and govBoth government budget and national income identi-
ty would then be operative.
In this study, production efficiency is not
considered to be affected at all by the existence of government corporations.
As previously stated, they are assumed to operate in the market
like any other private corporation, and their presence does not affect
the efficiency schedule of the economy.
4
Their peculiar feature is thus
related simply to the social utility that such investments have, while
the private ones do not directly enter the welfare function.
188
Therefore, for the sake of simplicity, we assume that government
and private consumption enter the welfare function in the same way, i.e.
only total per capita consumption will be referred to.
The welfare function is then given by:
(A.IV.1)
f" e~9t U(q ,kG )dt
0
c
which has to be maximized with respect to the following constraints:
(A.IV.2)
k = q(kT, pk) - (he/pk) - nk
(A.IV.3)
he =
(A.IV.4)
kG = kT
(A.IV.5)
k
(A.IV.6)
qC(k,
(A.IV.7)
g = d
T
pkq
(kT, p
T
= k + k
k
-
T
-
T
(1-h)e = (1-s)[q(k ,pk)+ (d+Trmg)pm -e]
ng
Now, we can solve (A.IV.6) for "d" and substitute it into (A.IV.1)
to obtain:
(A. IV. 7')
.
sqc + "kI
- se - (1-s)q,
-
(n + Tr )g
(1 -s
where the constraint (A.IV.3) is also considered.
Further, the relations
(A.IV.3), (A.IV.4) and (A.IV.5) can be used to transform (A.IV.2) into:
189
i = (1- )qI - n(I-S)k
(A.IV.2')
The problem is now the maximization of (A.IV.1) subject to (A.IV.
2') and (A.IV.7').
The Lagrangian can then be expressed as:
L = U(qcSkT ) + X[(1- )q1
(A.IV.8)
-
n(l- )kT
k
+ X[ sqc +
-
(1
-
se -
(1-s)q, _ (n +
Tr
)g]
s)p
Now, we can assign to fiscal policy the target of stabilizing the
m*.
rate of inflation rm at some value
As mentioned before, monetary
policy has to meet certain target levels of the price of
capital, pk
Therefore, given the private propensity to save and the steady
state variables, kT and g, the optimal growth path will be determined by
using the instrument
, i.e. the intensity of government capital obtained
through the government propensity to invest, h, as in (A.IV.3).
The first first-order condition is:
DL
=
0 U
k
T
T]
nlJ] + 1
X[
- [q-
D
1
1
k I,
2(1-s)p
which gives:
(A.IV.9)
=
= 0
gg2
U kT + X2 p
I/
k
(q -nkT)
-(n
+
m
)
(-s)pI
+
(A.IV.10)
2
2
=
0
which shows a zero shadow price of the government debt, since no constraints are so far considered in the growth of g.
order condition
is:
3L
qc
T
The second first-
T-n)
=qS T+1y[(-)
k
c
3
ak
1
by which we obtain, through (A.IV.10),
(A.IV.11)
c
S+ U
U
c ( kn
l- )
X1 =
-
)
1w
190
3q,
(1-6 ( -n)
,T
Now, by equalizing (A.IV.9) and (A.IV.l1), we obtain:
1
(A.IV.12)
[(r/pk - n) U kT -
(q - nkT) Uqcr]
[r/p
(q
=
- n) U k
-
-
nk )
T
At any point in time along any optimal path, and for any level of
consumption goods and share of government capital,
3, the marginal
utility of consumption has to be equal to the marginal utility of government capital.
Therefore, at each instant we can verify that:
3qc
Uq c
=
cDkT
UT
k
=
UkT
Hence, the optimal solution for
1
in steady state will be at a unity
level, i.e. the whole stock of physical assets has to be owned by the
191
government.
This result also means that an economy where any price is controlled by the government is equivalent to a fully centralized economy.
Such a conclusion may well be surprising, but it can easily be
explained.
We argued that fiscal and monetary policies can control the
price of money, pm, and the price of capital, Pk, both expressed in
terms of the price of consumption goods, pm, taken as numeraire.
Further, we did not constrain the expansion of government debt, g.
Therefore, its shadow price turned out to be zero.
limits can be considered as constraints on g.
the consumption goods market.
In fact, two upper
The first is met within
Indeed, provided the rate of inflation is
not zero, the effects due to the so-called inflation-tax on disposable
income have to be considered.
We may correctly refer to a minimum level
of private income related to some level of minimum consumption.
We
would then meet a constraint, such as:
Tf
m
g <-
Tr*
m
g*
Clearly, such a constraint is not met if the government maintains the
price of money constant, i.e. the rate of inflation at zero.
constraint is met within the assets market.
The second
Remember that in our model
the debt/money ratio "x", is supposed to be moved to maintain a stock
equilibrium in that market.
However, a "liquidity trap" can limit the
issue of money, or an aversion to government bonds can limit the issue
of debt.
These two cases can be expressed by a traditional "LM" curve,
either perfectly elastic or totally inelastic to the rate of interest.
0
192
If either of these situations is met, an additional constraint is added
to the previous (A.IV.2') and (A.IV.7').
(A. IV.13)
g
<
Such a constraint is given by:
g*
Our problem can then be expressed as:
o -Pt
fa e
U(q,
Max.
subject to:
T
k )dt
(A.IV.2'), (A.IV.8') and (A.IV.13).
The new expression for the Lagrangian is then:
=
L
(A. IV. 8')
U(qC,
SkT) + X1 [(l- ) - n(l- )kT
sqc +
Pk I - se(l-s)q,
+
-
(1
X3 (g
+
-
-
(n + 7rT)g]
s)
g*)
where, again we have two state variables, k
and g, and one instrument.
Now, the three first-order conditions for maximization are given
by:
Pk
Uk-
= 0
D
=U kT -
1
(q
-
/ (1
nkT) + X2 (qI)
-
s)p
from which:
U UkT
(A.IV.14)
1
=
T
(q - nk )
+XPk
+
2
q,
T
(q - nk )( - s)pm
193
and:
=
(A.IV.15)
+
0
ag
and:
+1(1-5)(r/pk - n) +X2[(sr +5r
=
0
r
=U
l
+ U
1
k
3kT
s)
(1-
-
)]
/
(1 - s)pm
Now, we can substitute (A.IV.15) into (A.IV.14) and (A.IV.16):
U kT
(A. IV.14')
U
'-
- nk T)(1 s)pM
r
kT
c
+
(A.IV.16')
+
nkT
(q
(1-5)[n -
(1-s) [n
(r/pk)]
3
(1-5)[n
(r/pk)
[sr + 5r - (1-s)(r/pk)]
(r/pk) ]n(1 - s)pm
can be eliminated by equalizing (A.IV.14') to (A.IV.16'):
U
U kT
+
(A.IV.17)
(q1[
-
nkT)
pk qI
T
3(q1
nkT)n(1
+
UkT
(1-s) [n - (r/pk) ]
+ X
r
qc
3>1
[
(-)[n- (r/Pk)
-spm
sr + 5r -. (1-s) (r/pk)
(1-s) [n
-
Further, A
-
-
(r/pk),] n(l- s)pm
]
194
Therefore, given Pk and pm, achieved by fiscal and monetary policies,
s and n as exogenously determined, the government intensity of capital,
T
5;, is left as a function of the total intensity of capital, k , and of
the shadow price of the government debt, g.
Now, a system given by the three first-order conditions can be
Indeed, given 1 and X2,
proven to be recursive.
3
is determined.
The relation (A.IV.16) can also be expressed as:
[sr + Sr
n]
(1-)[(r/pk) -
-
U
-
r
wc
(1-s)(r/pk)
(1
-
-
s)pm
U kT
kt
which can be substituted into (A.IV.14) to obtain:
A2
=
f 1 (k T, 5)
5
or
f 2 (kT, A 1
=
2
Hence:
2
U kT
(1-s) (r/pk)1
r
=U
Uk
+
q nk
(1-s) [(r/pk) - n) (1-s)pm
+
which can be solved for A2 as:
=
[U qr + U T
+ U k
/
(q 1
-
I,
-k
2
(q[
X2
+
[sr + Sr -
nkT).
nk
s)pm
195
(l-S)[(r/pk)- n](q, - nkT)(
[sr + Sr
-
- s)PM
- nkT
(1-s)(r/pk)] [q
Iq(l-S)[(r/pk) - n]
-k
Now we can substitute it into (A.IV.14):
U kT
+
1
[U q+c r + U kT
- nk)
q
+ U kT /
(qI
nkT)
(1-5 )[(r/pk) - n] PkqI
{[sr + 5r - (1-s)(r/pk)]I(q
After substituting the values of A, x2'
)
- nkT
3
-
PkqI (1-)
[ (r/pk)-n]}
given by the first order
conditions into the Lagrangian, we have:
U k.L
(A.IV.8")
L
=
U(q , fkT)
c
+
{
+
[U
(q1 -nkT)
r + U T
ckT
(1-S)[(r/pk) - n] Pk I
UkT/ (q -nkT
(
+
[sr+r-(1-s) (r/pk)
(1-)(q1 -nkT)
(1-s)
(r/k)]
+
I-(q
InkT)
-pkqI
1
(15 (r/pk) -n]
{[U qr+U TS +U kT/ (q -nkT
(q -nkT)
-(1-s)p
m
1}
[ sr+ r-(1-s) (r /pk )I
-nk
-
k qI (1- ) [(r/p kn)
196
sq +p
q -se-(l-s)q
-
(n+'rr)g]
+
(n+Tr )(g-g*)}
(1-s)pm
which can be simplified in:
=
L
U(q CkT) + U tT(l-) + X[pk I+sqc-se-(l-s)q -ng*(l-s)pm
where:
T
[U q r+U T +U kT/ (qi-nkT )]1- )[(r/p k)-n](q i-nk
[sr+ r-(l-s) (r /pk] qI-nk) -p kqI (l-)
[(r/pk) -n]
Now, by making use of Pontryagin Maximum Principle we have:
2
2
=
=
ax2
X2
+
(-DL/ak T
+
(-aL/Dg)
or:
(A. IV.18)
=
l
-
{U J
kT
+U
kT (1-)+(oX/ k)
(ng*+'irmg)
(A. IV. 19)
X2
1-s) m] +
[pkI1+sqc-se-(l-s)qc
[ (rs (+pk))Pk]
2
which together with (A.IV.2') and (A.IV.8') form a complete dynamic
system where the instrument
follows from (A.IV.17).
197
Chapter V - OPTIMAL DISCOUNT RATES FOR INVESTMENT DECISIONS:
MYOPIC
PRIVATE RULES VERSUS HYPEROPIC GOVERNMENT RULES
The debate on government investments and their optimal rate of
return has been concerned mainly with the case of projects involving
social benefits and costs.
Beyond this case, M.S. Feldstein1 showed
that the form of financing should also enter the evaluation.
He clari-
fied the two separate issues attached to measuring opportunity costs
and discounting for time.
be pointed out here.
Two peculiar aspects of our analysis need to
First, the kind of government investment we are
considering does not exactly fill the standard definition of "social"
investments.
Indeed, we consider the government to be operating com-
petitive corporations within a market economy.
Production and techno-
logy are the same for both private and public enterprises.
Second, when
we do not include government expenditure in the social welfare function,
we may also not include social benefits and costs from the evaluation
of the projects.
Only in the last section do we include them and work
out the different rules that have to be followed.
Therefore, the government projects we consider are of the selffinancing kind.
Indeed, if their cash flows are always negative, what-
ever the rate we use to discount them, they will always be wealth
decreasing.
This obviously does not exclude the case of occasional cash
deficits.
The point is that during their life time, their sum must be
positive.
When this happens, discounting them at the social rate of
time preference will leave the project with a non-negative present value.
198
Hence, their
financing
becomes
an
important issue to be investi-
gated.
Feldstein's analysis, however, seems to present one main short
coming:
the role that the share of government capital can play in the
determination of the shadow price of private investment is overlooked.
In the first section of this chapter, we examine the Feldstein
proposal for the kind of investment we are analyzing.
In the following
section, we will point out the myopic or hyperopic results attached to
the shortcoming we indicated.
1.
Shadow Prices and Time Discounting Rules for the Financing
of Government Projects
As is well known, in a second best world, there is no definite
rate of discount which can simultaneously represent time preference and
opportunity cost.
In some analyses, the rate suggested is the rate of
return on private capital, in others it is the time preference rate.
Further approaches suggest that a weighted average between the two can
be used.2
A clear picture of the situation is given by M.S. Feldstein.
He proposes to separate the evaluation of any opportunity cost involved
with the project financing from the discounting rule to be used.
Once full consideration of shadow prices is taken into account,
then the social time preference rates can and have to be used.
Govern-
ment investment expenditure can be financed through taxes or by the
issue of debt and money.
One dollar raised by taxes and used to finance
a government project reduces both private consumption and investment.
199
As far as the reduction of consumption is concerned, the social time
preference rate can appropriately be used.
On the other hand, the
reduction of investments at any time, "t", implies a reduction in the
future stream of consumption which could have been obtained from them.
Hence, the net present value of such consumption streams, discounted by
the social time preference rate, represents the opportunity cost of
foregone investments.
If we consider a one dollar reduction in future
investments, then the net present value of the consumption stream must
be greater than one dollar.
Following Feldstein's symbols, let us call
the present value, S, so that one dollar of tax revenue used to finance
government investment is worth3
[SA + (1-A)] dollars of private con-
sumption, where A is the proportion taken off from private investment,
and (1-A) is the amount of reduced consumption.
A similar procedure
can be used to evaluate the opportunity cost of a dollar raised through
debt and money issue.
However, a distinction between money and debt has to be made,
since "no interest" is paid on money.
Thus, if the government finances
investment by issuing debt, it needs to provide for interest payments,
too.
money.
These again can be covered by taxes and/or by additional debt and
Individuals receiving interest payments can then use them for
consumption and investment.
include all these steps.
A complete evaluation should, however,
Let us define B1 as the share of interest
)
payments financed by taxes; B2 as the share due to debt; and (1-B1 -B2
as the share covered by issuing money.
The bond holders are supposed
to consume interest income in a proportion, C, and invest it in a
200
proportion (1-c).
Let us define, "D", as the "excess" cost of one
dollar issue of debt, and "M" as the cost of one dollar issue of money.
Now, if goverment pays an interest rate, r, then:
(V.2)
rB 1 (AS + 1 - A)
is the cost of enforcing additional taxes, and:
(V.3)
rB2 (D + 1)
is the cost of imposing additional debt, and:
(V.4)
r(l - B1 - B2 )(M + 1)
is the cost of additional issues of money.
Against these costs, we have
to put the effects of interest earned by private investments.
These are
equal to:
(V.5)
r[C + (1 - C)S]
due to increased consumption and investment.
Therefore, the total
benefits and costs linked with interest payments are given by:
(V.6)
rB (AS + 1 - A) + rB 2 (D + 1) + r(l - B
--
- B 2 )(M + 1)
r[C + (1-C)S]
which may be discounted at the social time preference rate.
If we con-
sider the private propensity to consume as not depending on the interest
rate, then any debt, when issued, reduces private investment by an equal
amount.
The total cost of debt financing is, therefore:
201
(V.7)
D + 1 = S + (6)/STP
where STP = social time preference
discount factor
from which the social cost can be measured as:
(V.8)
D + 1
=
dS + r[(BA+C)(S-1) + B - S +
(M+1)(1-Bl-B2 )]
1
)
/ (d - rB 2
It is then easy to verify that D = S-1, if no interests are paid on debt.
This case can be applied to the measurement of the opportunity cost of
issuing money, for which we may say that:
(M + 1)
(V.9)
=
S
By substituting (V.9) into (V.8) we have:
D + 1
=
dS + r[(B1A+C)(S-1) + B1 - S(B 1 +B )]
2
/
(d
-
rB 2
)
(V.10)
so that (D+l) = S, either if r = 0, or alternatively, when:
(V.11)
C = B (1 - A)
i.e., when the propensity to consume out of interest payments is equal
to their proportion covered by additional taxes which reduces private
consumption.
Feldstein.
Relation (V.11) is similar to the result showed by
Indeed, as long as money does not earn any interest, the
inclusion of money in the financing of government expenditure, does not
change the equalization condition between the shadow prices of investment
and debt.
Including money in this case is like having a higher share of
taxes on investments.
The effect of increasing money on the shadow price
202
of investment will be considered later.
The complete formula to evaluate government corporate investments
can be stated as:
(V.12)
NPV
=
t=O
(TRt-TCt)[(SA+1-A)Q1 + (D+1)Q2 + (M+l)(l-Q Q )]]
2
3
/ (1 + d)t
TR = total revenue
where:3
TC = total costs
Q
= share of tax financing
Q2 = share of debt financing
1 -
-Q2
= share of money financing
Such relations correspond to Feldstein's contribution, where no social
benefits or costs are implied, but where money issuing is considered.
2.
Private investments shadow price, the propensity to invest,
and the role of the government's share of capital
The case of a constant shadow price of private investment and of
a constant propensity to invest is hardly met within the framework of a
mixed economy where the share of government capital and the size of
government investments are relevant enough not to be considered "marginal" to the whole economy.
Therefore, the effects on the price of
capital, Pk, and hence on private investments, have to be evaluated.
Within a fully employed closed economy, the price of capital depends on
the interest rate and on the debt/money ratio.
Whatever the proportions
203
in which money and debt are moved, the price of capital will in all
cases increase (as shown in Chapter 1), while the interest rate is
Alternatively,
likely to be lowered if more money than debt is issued.
Therefore, any
it is likely to be increased if the other case is met.
debt and/or money issue decreases private investment and an increasing
value of S should be considered.
Private propensity to save may still be considered a constant.
The result will then be that private portfolios will include more
financial assets and less physical capital.
Within a small open economy, both the price of capital and the
interest rates are given.
Therefore, any government deficits cause a
capital outflow which needs to be counterbalanced by a tighter fiscal
policy.
Private disposable income will be lowered and both consumption
Hence, any dollar taken off by taxes and
and investment will decrease.
used to finance government investments can be considered to affect the
private allocation between consumption and investment.
In both cases, we need to substitute S and A in (V.12') with:
(V.15)
S*
tt
=
S(TRt - TCt)
(V.16)
A*
=
A(TR
t
t
- TC )
t
>
as /D(TR -TCt
t
t
DA /D(TR -TC) < 0
t
t
t
We now have:
'(V.12"1)
NPV
=
[TRt -Tt][(S*A* -l-A*)Q
+ (D+l)Q2 + (M+Q)(
1
Q9)]
/
(l+d)t
204
Then, cases of hyperopic decisions can be met whenever (V.12) is
applied.
Government investments processed under (V.12) should have
been refused.
While the government tries to increase the accumulation
of capital, the economy comes out with less capital than in the case of
no intervention.
Finally, this rule can also be applied to optimal subsidy policy.
(V.12") implies an over-subsidization which will lead to a lower
Again,
investment process.
3.
The Case of Social Benefits and Costs Entering Government
Investment Decisions
Even if we refer in our analysis to government investments as
not implying social benefits and costs, it is not difficult to apply
the results we reached in the previous section to such a case.
In the evaluation of the cash flows, we would have to add together the "excess" of social benefits over total revenue and the "excess" of social cost over total cost.
(V.17)
NVP
Z t
Hence, (V.12") will be defined as:
=
[ TRtt _TC t] [(S*A*-l-A*)Q 1)Q
+ (D+l)
(Dt Q2 + (M+l)(l-Q
+
M1 1Q1 -Q
Q2 )]J/(l+d)t
+ EF(b-TR) + (TC - c)]
/ (1 + d)t
From (V.17), it is easy to verify that the shortcomings we pointed out
earlier have to be corrected, even if social benefits and costs are included.
205
-
Part Two
TRENDS AND CYCLES OF THE ITALIAN ECONOMY AND THE ROLE
OF GOVERNMENT CORPORATION INVESTMENTS IN THE LAST DECADE
INTRODUCTION
Chapter I
-
THE ECONOMETRIC MODEL OF THE UNIVERSITY OF BOLOGNA
LINK PROJECT:
Chapter II
-
STRUCTURE AND LINKAGES
THE IMPACT OF GOVERNMENT CORPORATION INVESTMENTS:
1967.1 - 1976.IV
1.
-
The Investment Process in Italy
2.
-
The Effects of Government Corporation Investments on
Production, Accumulation and Growth
3.
-
The Effects on Employment
4.
-
Prices, Wages and Distribution
4.1
-
The effects of Government Corporation investments
on Italian inflation
4.2
-
Wages, productivity and unit labor cost
4.3
-
Distribution
5.
-
The Foreign Accounts Sector
6.
-
The Government Budget
206
INTRODUCTION
The post-war growth of the Italian economy has been remarkable for
its intensity and continuity.
The major economic transformations and
developments of the 50's and the early 60's led Italy into the ranks of
the most industrialized countries. A peculiarity of this growth has
historically been the frequent Government intervention through direct
investments in competitive enterprises.
Indeed, Italian Government corp-
orations have had, and still do today to an increasing extent, a consistent share of several markets.
In fact, the initial proposal for a Government Agency to take over
and manage privately organized enterprises dates back to the days following the Great Depression in the early 1930's.
At that time the banking
system faced serious difficulties as a result of the collapse of several
major industries.
The I.R.I. (Istituto per la Ricostruzione Industriale) was then
assigned the task of assuming control of the major banks and steel corporations.
State ownership was subsequently reinforced by the foundation of
the E.N.I. (Ente Nazionale Idrocarburi) in the early 50's.
The purpose
of this Agency was to realize a cheap and easy supply of energy to support
industrial growth.
Until the mid 60's, direct intervention in the market was limited
to the fulfillment of long-run structural objectives.
The I.R.I., from one side, and the ENI, from the other, within a
competitive framework, were supposed to regulate the markets, filling the
two basic needs of industrial growth, oil and steel.
aims were successfully met.
In retrospect, these
207
However, the recessions experienced after the overheated period of
1962-1963 seem to have profoundly changed the role of the Italian Government corporations.
To the original long-run growth targets, short-run
stabilization targets have been increasingly added.
In an, as yet, un-
finished process, during the past decade, intervention through Government
corporations has been used in an attempt to meet several different targets
--
full employment on some occasions, stabilization on others, industrial-
ization in the southern part of the country, take-overs of failing private corporations, etc...
Beyond some obvious benefits of pursuing these targets, the actual
results are quite poor, and have puzzled many observers.
Jumping from
one target to another, and from one policy to another had led Italian
Government corporations to a situation in which they no longer appear to
have a clearly defined role.
Today, their industrial and financial
troubles are far worse than those of private enterprises.
Most likely, the overcoming of current economic difficulties in
Italy depends on the future strategic role of the Government production
sector.
However, our purpose in this study is not to investigate analytically the structure of the public sector, nor to analyze the full impact
of its production -economy.
financial and industrial decisions on the Italian
Rather, our analysis is limited to a first attempt to measure
the effects of their investment decisions.
The only quarterly model avail-
able for Italy, the one formulated by the University of Bologna, is here
used to represent the structure of the economy.
Unfortunately, historical data for Government corporation invest-
208
ments are available only on an annual basis.
constrained to compute quarterly series.
sidered.
Therefore, we have been
Three hypotheses have been con-
The case of a moving average was tested together with a pro-
cycle and an anti-cycle profile.
The simulations performed were limited
to treating Government Corporation investments as a demand shock which
would be absent if such investment expenditures were not made.
Compari-
sons with the "control" solution let one measure the effects on the production sector, and on Government accounts' relations.
Clearly, because
of the many constraints met in the analysis, no definite interpretation
can be given to the results we obtained.
has some major failings:
First, the econometric model
the financial sector and the interest rate
structure are still inadequate, and the foreign account sector does not
yet include capital movements.
Second, the specific financial policy
used by Government Corporations in their investments is not considered.
Third, the impact of Government Corporation investments on the competitiveness of the economy and on the behavior of costing, pricing and accumulation is also not considered.
Fourth, the results we obtain cannot
be definitely attributable to government corporation investments.
In
fact, given the structure included in the model, any other investment
expenditure performed with the same time profile of government investment would produce the same kind of effects.
These simulations, therefore, must be regarded as only a first
approximation.
They need deeper and more comprehensive analysis.
Never-
theless, some quite interesting interpretations of the impact of government investments on the Italian economy can be outlined.
Indeed, the
increasing weight of government investments on growth, capital accumula-
209
tion and employment emerges in a clear cut way.
In the early seventies
they gave considerable support to the whole economy.
Like any demand shock, their short run effects are to increase inflation and government and foreign account deficits.
However, the con-
tribution to the growth of capital stock, and consequently to both production and productivity, soon becomes relevant.
The switching point
between the two effects, i.e. the demand push and the production capacity effects, was between 1971 and 1972.
Had this not occurred, the
performance of the Italian economy would have been worse than the actual
path experienced after 1972, either in terms of production and employment, or in terms of inflation and BOP deficits.
However, two critical points on the efficiency of the system have
to be considered.
Government corporation investments are shown to have
led Italian manufacturing industries toward, first, higher capital/labor
ratios and, second, lower output/capital ratios.
Therefore, such invest-
ments seem to have been made at a quite high capital intensity, associated with some traditional diminishing return path.
While the long run impact is quite clear, the contribution of government corporation investments to short run stabilization is barely
significant.
The results of both the pro-cycle and anti-cycle hypotheses
are close to the ones of the moving average profile.
Obviously, a historical quarterly series would be the only correct
way of testing their stabilization power.
However, even with such a
series, once investment projects are decided, it might be difficult to
have their realization follow cyclical paths, because of the constraints
of technical and managerial rules.
210
Chapter I --
THE ECONOMETRIC MODEL OF THE UNIVERSITY OF BOLOGNA - LINK
PROJECT:
STRUCTURE AND LINKAGES
Several econometric models for the Italian economy have been estimated and tested over the last few years.
Unfortunately, the limited
availability of data and the recent introduction of a new accounting
system (S.E.C.)2 have often limited these efforts to the investigation
of major aggregate phenomena.
The gap with the more sophisticated models
elaborated in the rest of Europe and in the United States is still wide.
The only quarterly model, completed and passed through a sufficiently
long period of tests and simulations, is that of a group of economists
at the University of Bologna.
This model has a basic neo-Keynesian structure where aggregate demand, managed by several fiscal and monetary tools, determines the level
of production and employment, while its direct role in price determination is relatively weak.
Indeed, a mark-up mechanism on direct cost,
mainly the labor-cost, is the basic law of price formation.
Clearly,
demand conditions have an indirect law on prices through their effects
on the unit labor cost.
In formulating the model, two major constraints have been considered.
Indeed, the first effort of this analysis was devoted to an invest-
igation of the impact of short run policy decisions.
Therefore, to test
the effect of several government instruments, a fairly wide fiscal and
monetary sector was needed.
The second constraint was due to the relations of the model to a
wider econometric effort, involving an international project developed
211
at the University of Pennsylvania.
In fact, the University of Bologna
model is part of the Project LINK which, as is well known, tries to relate several national models to a world-trade structure.
Therefore, the
foreign sector had to be elaborated in a major way to meet the needs of
the international linkages.
The other sectors of the economy are, on
the other hand, still simple and unsophisticated.
Further analyses are
currently trying to improve their performance.
The actual version of the model is estimated over the period 1960.
I-1974.IV according to a standard TSLS
are organized in four major blocks:
iethod.
The structural relations
a) final demand, b) production and
employment, c) government sector, d) monetary relations (see Chart I.1).
1.
Final Demand
Aggregate demand in the model is explained by three major behavioral
rules:
domestic, foreign and Government demand.
The main item of do-
mestic demand is private consumption, divided into durable and nondurable goods.
It is related through a distributed lag structure to dis-
posable income, to income distribution, and to the conditions in the money
market.
Therefore, both wage-price relations and fiscal-monetary policy
affect private consumption.
Total investments are explained by a stock adjustment mechanism
applied to the two different functions of fixed capital expenditure and
inventories.
Gross domestic product and domestic demand enter these func-
tions together with interest rates and credit rationing, explaining the
cost and availability of funds.
Fixed investments are then supposed to follow independent rules
according to the expenditure for "structure," and "machinery and equipment."
w
Disposable
Income
Current
Prices
Government
Sector
I
Income
Distribution
A
Average
Worked
Total
Worked
Hours
''Hours
Industry
Disposable
Income
Constant
Prices
Private
Consumption
mn
To
E
Industry
National
Income
Current
Prices
C4
i~~
Total
Employment--
5
Nat.
ProduPt
Constant
Gross Real
Product
Industry
Hourly
Prices
Wage
Unemploym.
T
Monetary
Sector
Industry
-0Potential
Investment
-
Gross
-
Final
Demand
-
Product
Capacity
per hour
Industry
Industry
I
~~K5
Capacity
Foreign
Utilization
Accounts
Industry
2
1
2
3
4
5
Government Expenditure
World Trade and Prices
Monetary base and discount rate
Employment in Agriculture
Prices of imported raw materials
Demand flows
- --
- - - -
0
Supply flows
Main exogenous variables
-Prices
213
In the latter item, to include both expectations on profitability
and the effects of income distribution, profits and cash-flows are also
considered.
Net exports are the second major component of final demand.
They
are computed as the difference between total exports for goods and services and total imports.
Disposable income and the level of world trade
relate such items to domestic and foreign purchasing capacity, while domestic, export and import-prices explain different conditions of international competition.
The third item, Government demand for goods and services, is mainly
considered as a policy tool.
Indeed, Government consumption is given
exogenously in monetary terms, being endogenized in real terms through an
endogenous deflator.
Government investments, on the other hand, are not
distinguished from private investments.
While they can still be used as
an independent tool, their behavior is not distinguished, and is included
in the estimated behavior of the three investment functions.
Furthermore, the investments of Government Corporations in the
Italian national accounts are not considered part of the public sector.
Thus, we are constrained to use a model which includes private, Government Corporations' and strictly public investments in the same item.
2.
Production and employment
Once final demand is explained, the level of production is also
determined.
The composition of demand also tells us the level of activity in
manufacturing, building, and services which then determines the level of
214
employment through a stock-adjustment mechanism.
Manufacturing is obviously a key sector of the Italian economy.
Therefore a very important role is assigned to it in the model.
Indeed,
actual and potential production in manufacturing are the main cyclical
indicators affecting the short-run dynamics of productivity.
Therefore,
with a given labor-force, the rate of unemployment is measured by considering the level of activity and productivity.
A standard Phillips curve is then introduced to measure the
dynamics of wages with respect to the rate of unemployment.
Wages are
also determined by the consumption price index because of the very well
known wage-indexation system operating within the Italian economy.
The
ratio between monetary wage and productivity is a measure of the unit
labor cost which enters the deflator for the value added through the
mark-up law of price formation.
In the short run, however, the mark-up
on labor cost and raw material is not considered as a constant but is
supposed to depend on the level of demand and on the price of imported
raw materials.
3.
Government Sector
The current account deficit of the Government sector is the main
indicator of Government Budget policies.
The major item of expenditure is given by purchases of consumption
goods due primarily to wages and salaries and secondarily to rents, depreciation, and direct consumption of goods and services.
Government revenue is mainly due to direct taxes, indirect taxation and pay-roll taxes.
The quite complicated fiscal system of the Italian economy is
215
simplified in the model in order to explain the long lag between the time
or formal ascertainment of tax revenue and its actual payment.
4.
Monetary Relations
The banking system is the key of the monetary sector.
The vari-
ables directly controlled by policy operators are exogenously determined.
The main market considered is the one for demand and savings deposits,
and a rate on long term bonds is supposed to clear it.
The channels
of monetary policy connect monetary decisions to the real sector of the
economy, which is therefore affected by interest rates and a credit
rationing index.
216
Chapter II --
THE IMPACT OF GOVERNMENT CORPORATION INVESTMENTS;
1967.I-
1976.IV
1.
The Investment Process in Italy
Within several western countries, the expenditure for investment
goods is usually the most subject to cyclical fluctuation.
In Italy,
however, the instability of the demand for investments is far greater
than in many other cases.
Indeed, after the first post-war crisis of
1963-64, the behavior of Italian investments has followed a very
irregular path.
A further characteristic can be outlined by considering the three
different medium-run trends experienced during the last ten years.
As
shown in Figure II.1, where the variable TCINV refers to total fixed
investments, including the expenditure for machinery and equipment and
the expenditure for both industrial and business construction, an increasing phase from 1967.1 until 1973.IV is followed by a decline lasting
almost two years and a recovery period in 1976 which brings the level
back up only to that reached in 1971.111.
The declining trend of the last few years is also registered in
percentage terms with respect to GNP.
As referred to in Table II.1,
from a level almost exactly 20 percent, the ratio falls to 17.7 percent.
Further interesting information emerges from considering government
corporations and private investment behavior separately.
As already noted, government corporation investments are available
only at an annual level.
We therefore considered three different hypo-
theses for representing their quarterly outline.
Figure 11.3 shows the
217
three cases.
No relevant differences seem to be attached to the differ-
ent hypotheses until 1971-72.
Major variations might have been experi-
enced after that point if short run stabilization policies had been pursued.
However, as we will see later, the effects related to each of
them do not seem very different, and the moving average case will be
considered in most of the following comments.
By comparing the rate of growth of private and Government Corporation investments, Table 11.4, their different behavior comes out very
clearly.
Indeed, the role of Government Corporation expenditure for
investments goods is very remarkable in the first part of the decade,
from 1968 until 1972, while a deeply negative contribution is shown for
the last four years.
Private investments, on the other hand, after the substained growth
of the first three years, show a very long period of decline lasting over
two years.
It is interesting to note that while Government Corporations made
a great investment effort during the stagnant years of 1970-72, they did
not react to the 1973-74 growth.
Instead, they entered a dangerous per-
iod of decline, not ended even during the recent 1976 recovery.
This
phenomenon is even clearer in Table 11.5 and Figure 11.4, where the ratio
between Government Corporations and national investments are presented.
From a level ranging around 9 to 10 percent in the 60's, the ratio
grows to over 16 percent in 1972 and then declines to
11
-
12 percent.
The absolute size and timing of Government Corporation investments easily
show how important they have been and could be in the future for the
Italian economy.
Therefore, their impact on the economic system is by
218
Table II.1
Year
-
Total Fixed Investments at 1963 prices
billion of liras
Fixed Investments
Fixed Investments
as percentage of
GNP
1967
6896
18-95
1968
7567
19-52
1969
8134
19.65
1970
8828
19.73
1971
8941
19.95
1972
9069
19.28
1973
9749
19.93
1974
9926
19.38
1975
8946
17.91
1976
9754
17.71
219
Table 11.2
6702
b 103
104
6801
b802
6803
0
W.104
0
0
0
0
-
6904
7001
-700J.
7004
7004
1101
7102
7103
'1104.
7201
7202'
7203
1204
* 7301
1302
7303
73V4
7401
7402
7403
74041
7501
7502
7503
7504
1601
1602
7603
7604
TCINV=Total fixed Investment,
control solution
TMINV=Total fixed investments,
moving average solution
TCINV
rM ININV
1645.0 0
1489.00
1536.uo
1545.00
1551.00
1547.00
1723ou.
17t3.00
1772.00
17b9.00
1837.00
1938.00172100
2023.00
19D5b.00
6901
6902
6903
-
0
0
0
S
6
0
0
0
0
0
0
S
2099.00
2223.00
1$6 .0O
2100.00
21 1.00
2268.00
23U9;0o64.00
2120.00
- 21/0.00
2413.00
2238.00
2139.00
.2243.)0
2%
J400
e0!.00
2333.00
IbI8.00
I400
1736.ou
5d,/-00
2002.00
b16'U.00
dSS.00
189.00
e015.000
1 62.00
1907.00
2146.00
19bi.Q0
164b.00
+1b'+.00
2014.00
2355.00
237b.00
2041.00
o
.0
e Ui.5.0 0
2375.00
2666.00
es41.oo
2410.00
21J5.00
0
2496.00
2415.0U
9j / 1.00
2171.00
0
2301.06
220 .0 0
ee.oo.
1929.00
2149.00
22ki9 .00
1851. 0O
0
1b400
248boo
4
0
0
0
2334.00
2435.00
245.00
2500.00
n
1910.00
199.00
2090.00
21b2.00
dlbb.00
92
billions of 1963 lire
TCINVm Total Expenditure for Fixed Investments, control solution
TMINV= Total Expenditure for Fixed Investments, moving-average solution
Fig.II-1
MINIMUMV
1489.00000
MAXIMUM=
2666.00000
6d03
6d04
.
-
.
6d03
-
610'.
6401
TCINV
o90
.
TMINV*
-
1004
1101
1
0201
1203
.
.
7202
-e
.
1303
.
1301
1302
.
7204.
140,e
"
1304
1401
1402
7403
-
1404
.
1602
1603.
1604 .
-*
seesessessessees~eseeeeeeseesesseesete..eaeeepessaesgeeeeessces0
Fig. 11.2
MINIMUM=
Differentials between total fixed investments under the
control solution and the moving average solution, billions
of 1963 lire.
0I))o)o(
.40
14,aX
IN
J..=
35.0000000
.
610
I/
-
h804.
h 40.
t0%404
I'eSU.
-
DTIN
10114
IdU e
1104
ej)3
LO -4
1,401
Noe
Itt'IA
loue
1'6t)
.*
................
*1*.......
N
222
Table 11.3 - Government Corporation Investments:
MIPI= quarterly seties obtained by a
moving average criterium
YIPI= pro-cycle case
AIPI= anti-cycle
case
*
6701
6702
6703
6704
6801
6802
6803
6804
6901
6902
6903
6904
7001
7002
7003
7004
7101
7102
7103
7104
7201
7202
7203
7204
7301
7302
7303
7304
7401
7402
7403
7404
7501
7502
7503
7504
7601
7602
7603
7604
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
154.000
158.000
166.000
171.000
176.000
181.000
192.000
199.000
196.000
200.000
221.000
235.000
250.000
265.000
297.000
308.000
321.000
332.000
351.000
359.000
362.000
371.000
390.000
395.000
386.000
372.000
380.000
388.000
387.000
376.000
360.000
344.000320.000
315.000
324.000
331.000
340.000
325.000
309.000
285.000
1
.
00
YIPI
AIPI
157.000
163.000
163.000
165.000
179.000
182.000
190.000
195.000
207.000
225.000
215.000
191.000
260.000
268.000
278.000
285.000
341.000
322.000
325.000
337.000
355.000
357.000
383.000
397.000
296.000
357.000
385.000
402.000
333.000
347.000
334.000
308.000
323.000
309.000
305.000
315.000
277.000
282.000
282.000
293.000
165.000
163.000
163.000
157.000
195.000
190.000
182.000
179.000
215.000
191.000
207.000
225.000
285.000
278.000
268.000
260.000
322.000
341.000
337.000
325.000
397.000
383.000
357.000
355.000
402.000
384.000
357.000
296.000
334.000
308.000
333.000
347.00'0
305.000
315.000
323.000
309.000
293.000
282.000
282.000
277.000
2
3
-
. .0 . . . . .0..0 0 0 . 0 0
NIPI
billions of lire, constant prices
Fig. 11.3
Government- corporation investments
4
6801
.
.
o
6802
.
6803
6804
6901
.
6701
67026703
0
0
.............
0
*a0*00
o**
00....Got@....0.0
0
00
00
0
0..00
402.0"0000
e@0000
MIPI = quarterly series, moving average
YIPI = quarterly series,pro-cycle
AIPI = quarterly series, anti-cycle
.
.
6704
flAKInl
154.000000
6902
6903
6904
7001
+
.
7002
7003
7004
7101
7102
7103
7104
.y
.
-
7202
7203
7204
7301
7302
7303
.
P-
.
.
.
.
.
7402
7403
7404
7501
7502
7503
7504
7601
7602
7603
7604
.
7304
7401
00* 000
0. .0es00e0000000o*.eeeO..0
,00 00* 0000
0 0.*000 o00.0000*0**0
-
7201
+
MINItru=
224
Table 11.4 - Annual rate of change of fixed investments
at 1963 prices
year
total
1968
9.73
15.25
9.16
1969
7.49
13.40
6.79
1970
8.53
31.45
5.82
1971
1.28
21.70
- 1.68
1972
1.43
11-37
- 0.36
1973
.7.49
0.53
8.90
1974
1.81
3.86
2.87
1975
- .9.87
1976
9.03
government
corporations
investments
-
12.06
-
2.40
private
investments
- 9.49
10-95
225
Table 11.5 - Government corporation investments as
percentage of total fixed investments,
1963 orices, quarterly series.
MIPIP
6701
6702.
6703
6704
6801
6802
6803
6804
6901
6902
6903
6904
7001
7002
7003
7004
7101
7102
7101
7104
7201
7202
7203
7204
7301
7302
7303
7304
7401
7402
7403
7404
7501
7502
7503
7504
7601
7602
7603
7604
.
.
.
.
.
.
.
.
.
.
.
.
.936170F-01
.917005.-C1
.945330E-01
.969*011E-C1
.9914912E-01
.985302F-01
.990712 F-01
.
.983687F-01
.100204
.9452H 34 -01
.994152E-01
.126616
. 1190.49
.123199
.
.
.
.
.151415
.
.
.
.
.
.
.
.
.
.
.130952
133391
. 152195
.145462
.160411
. 169238
. 165403
.165675
. 169310
.164046
. 157')62
.1600 00
.145536
1566 80
.
.
.
.150641
.
.
.145455
138431
.
.
.139070
.
. 142728
. 150768
.1411605
. 145673
.133470
.
.
.
.
.124346
.114000
0.091700
NINIfUM
6803
6804
.
*
*
.
.
*
6702
6703
6704
61301
6802
.
e
.
6901.*
6902
MPIP
6903
.
*
6904
70C1
7002
7003
0.169310
MAIIUIR
*
6701
Fig. 11.4
Government corporation investments
as percentage of total investments
0
.
0
7102
7103
7104
7201
7202
7203
7204
.
.
.
-
*
.
7C04
7101
-
.
7301
7302
.
6
7303
-
.
.
0
.
-
.
.
.
7304
7401
7402
7403
7404
7501
7502
7503
7504
7601
7602
7603
7604
..
....
.. ..
.
..
..
..
..
.
......
0
-
e
000
0
. e
. *
-*.
..*
********
*******
*******
*******
227
far wider than in any other country.
The following sections will try to give an analytic measure of
their recent role within the Italian economy.
2.
The Effects of Government Corporation Investments on Production,
Accumulation and Growth
As mentioned before, we have simulated the University of Bologna
econometric model for the case of complete absence of Government Corporation investments from total fixed investments.
Therefore, a rough measure
of their effects can be obtained by the difference between such results
and the control solution of the system.
This section is mainly concerned with the impact on domestic demand for consumption and investments.
The effects on Italian foreign
trade will be investigated in a following section.
As it might be evident from the previous considerations on the
historical profile of Government Corporation investment expenditure, their
contribution to GNP growth seems to be quite poor in the sixties, becoming increasingly important during the seventies.
Indeed, as Table 11.6 and Figure 11.5 show, in the case of no Government Corporation investments, Italian GNP would have been lower by a
minimum amount of 60 billion
(at 1963 prices), in the second quarter of
1969, and by a maximum of 736 billion
in 1976.IV.
In percentage terms,
such a differential would range from 1 percent up to more than 5 percent
(see PCGNP in Table 11.7).
However, the decreasing path of Government Corporation investments
of the last three years, does not show its impact on the level of production.
Indeed, the long lag structure included in the model between
228
investments, considered as a final expenditure, and their contribution to
production capacity produces these effects well beyond 1976.
A further point to be stressed is the multiplier effect on one
lira of government corporation investments in terms of gross national product.
These effects are computed in each quarter as the ratio between
the differential of GNP, between the control and the moving average solution, and the differentials of government corporation investments in the
same quarter.
As shown in Table 11.7, MUGNP, the multiplier is well be-
low 1 until the second quarter of 1972.
After that point, it increases
in value, reaching 2.5 at the end of 1976.
It is interesting to note
that its value decreases only in three cases, 1972.111, 1975.1, and 1975.
IV, corresponding to the general acceleration of domestic demand registered one or two quarters previously.
A sophisticated tax structure relates GNP to disposable income in
the model.
The differential behavior of the last variable can then be
computed as shown in Table 11.7.
Because of the fiscal-drag, the effects
produced on disposable income are obviously lower than the ones on total
GNP.
Only one peculiar effect can be noted.
The percentage between
differential disposable income and GNP shows three different trends.
The
first one is a decreasing path from .72 in 1967 to almost zero during
1968 and mid-1969.
After that point, it increases to .53 and stays
around .50 during 1972-73.
back to .46 in 1976.
A final declining trend brings the ratio
This behavior can obviously be taken as the actual
marginal tax effect working within the Italian fiscal system.
Therefore,
it indicates that in very recent years, the Italian fiscal system has
229
become more severe, and its marginal fiscal drag is actually around 52
to 53 percent.
The behavior of disposable income is an important ele-
ment in the determination of private expenditure for consumption goods.
The historical profile and the ones obtained from our simulations
are reported in Table 11.7 and pictured in Figure 11.8.
Again the effects
due to Government Corporation investments are insignificant until the end
of 1969, after which point they increase to the level of 231 billion lire
at the end of 1976.
effect
(See Table 11.9).
However, both the percentage
on private consumption, and the multiplier effects, shown in col-
umns 2 and 3 of Table 11.9 are well below the impact on GNP.
In fact, while the multiplier on GNP jumps to over 2, the one on
consumption expenditure is always below unity and only at the end of 1976
reaches its maximum at .81.
Much more interesting turns out to be the profile of fixed investments under the alternative hypothesis that we considered.
The impact of
Government Corporation investments on the accumulation process is shown to
be very consistent over the entire period.
Indeed, the differentials
range from a minimum of 156 billion lire to over 300 billion in the final
year.
As is well known, one of the major worries about Government invest-
ments, in general, and about Government Corporations in particular, is
concerned with the possibility of their crowding-out private investment.
In the model we considered, there are two major linkages through
which this phenomenon can be noted.
In fact, Government investments do
indeed compete with private ones within the financial markets, pushing
interest rates up and reinforcing the impact of credit-rationing policy.
Unfortunately the structure of the interest rates in the model is not very
230
sophisticated, the long-run bond rate being the major variable.
In the
actual version, however, this rate is taken as an exogenous variable and,
therefore, the only endogenous constraint we met is the level of credit
rationing.
Thus, it may be assumed that an expansion of the money supply
maintained the historical level of that interest rate constant under the
alternative simulations we performed.
the validity of our
This forced hypothesis may limit
results which can then be taken only as a minimum
measure of the impact of Government Corporation investments on total fixed
investments.
Therefore, the crowding out effect that we will outline,
would be higher if interest rates were to be pushed upward by the financial needs of Government Corporation investments.
However, the behavior of investment expenditure in Italy has been
proven to be only slightly dependent on interest rates, while the acceleration effect on GNP seems to be far more important.
Furthermore, Italian
monetary policy has often been managed through quantitative control of
credit and rationing rather than through interest rate policies.
Since
these effects are included in our results, the error we incur should not
be very relevant.
The crowding out effect can be analyzed by considering the variable MUINV in Table II.10, which reports the ratio of the differential
between actual total investments and the level registered in case of
absence of government corporation expenditure to the increase of government corporation investments.
Therefore, so long as this ratio is below
one, we can refer to a crowding out effect.
As can be seen in the table, three different periods may be outlined.
In the first one, lasting from 1967 until 1969, and in the third
231
one confined to 1976, no crowding out effects are registered.
In fact,
the investments that the Italian economy would have lost, are proven to be
higher than the Government Corporation expenditure itself.
Therefore, in this period, Government Corporations seem to have
indirectly pushed the private expenditure for investments up, by pushing
up levels of activity.
The middle years show instead a clear crowding
out effect, which, however, does not exceed 20 percent of the expenditure.
Clearly, the effect is proven to be heavier during the period of higher
recovery of private investments.
This case is illustrated in 1974.11, a
period during which private investments' expenditure reached a peak-level,
and a tight credit-rationing policy was followed by the Italian monetary
authorities.
Therefore, in that quarter, the additional contribution of Government Corporation investments to the accumulation process was very small.
A quite full crowding out effect seems to have been experienced according
to the model because of competition for credit.
The profile of expenditure for machinery and equipment is shown to
be very different from the one for residential buildings, plants and
structures.
Three main considerations have to be outlined.
First, the
model does not distinguish yet between residential and non-residential
construction.
This explains the astonishing fluctuation of this expend-
iture and its declining trend starting in 1969.
As often recalled,
the
deep depression of residential construction has largely been a limiting
constraint on Italian growth,
The level of housing starts has dec4egsed
by 50 percent over recent years.
232
A second consideration is related to the different reaction shown
by the two kinds of expenditure.
Indeed investments in machinery and
equipment seem to recover earlier than ones for construction.
This can
be explained by the poor medium-run performance of the economy during the
1970's and the increasingly unstable cycle.
Under such conditions the
renewal of machinery is always decided well before the building of new
plants.
A further point to be stressed is again the peculiar impact registered in the second quarter of 1974.
The crowding-out effects are shown
to be much heavier than is the case for machinery and equipment.
Table 11.12 and Figure 11.12).
(See
In fact, if no government corporation
investments were produced, some relaxation of credit rationing could have
pushed higher investments in construction.
Indeed, the effect of the credit rationing is proven by the model
to be much stronger for construction than for machinery.
Therefore, the
quantitative control of credit introduced in that period show a heavier
negative effect from government corporation expenditure.
The law of capital accumulation is used in the model to estimate
the stock of physical assets within manufacturing industries.
As regis-
tered in Table 11.13 and pictured in Figure 11.13, the contribution of
Government Corporations has been increasingly important during the last
decade.
Without the contribution of those corporations, at the end of
the period the capital stock of manufacturing would have been lower by
over 4500 billion lire.
of the model.
This variable is quite important in the working
Indeed, as a ratio to the value added, it gives the level
of capacity utilization which directly affects investment functions.
It
233
Table 11.6
C@N"=
MGNP=
YGNP=
AGNPw
NatiOU&I
Natlen&
National
National
Gross
Gross
Gross
Gross
CGNP
6701
6702
6703
6704
6801
6802
6803
6804
6901
6902
6903
6904
7001
7002
7003
7004
7101
7102
7103
7104
7201
7202
7203
7204
7301
7302
7303
7304
7401
7402
7403
7404
7501
7502
7503
7504
7601
7602
7603
7604
8-795.00
9038.00
9158.00
9403.00
9359.00
9499.00
9815.00
10100.0
10152.0
10386.0
10612.0
10226.0
11229.0
11144.0
11172.0
11196.0
11293.0
*
11181.0
11163.0
.
11183.0
11759.0
11622.0
11540.0
12120.0
11664.0
12190.0
12220.0
12823.0
127514.0
13084.0
12700.0
Product,
Product,
Product,
Product,
MGNP
Control solution
Moving-average solution
Pro-cycle solution
Anti-cycle solution
YGNP
8647.00
8645. 0(
8901.00
9032.00
9304.00
9279.00
9431.00
9752.0n
10035.0
1090. 0
1032 7. 1
10553.0
10124.0
11120.0
11005.0
8896.00
9136.00
9311.0)
9277.00
9429.00
9754.00
11005.0
11 con. 0
11049.0
10 916 . 0
10870. 0
10858.0
11407.0
11260.0
11148.0
11695.0
11258.0
4(;Nr
8637.00
8897.00
9036.00
9320.00
9261.00
9424.00
9763.01
10038.0
10('0 .)0
U11079.1)
10304.0
10072.0
10135.0
1f562.0
10563.0
10170.0
10999.0
11017.0
11(19.0
11028.0
10923.0
10890.0
19876.0
1114019.0
10133.0
11C83..0
10992.0
11032.0
11047.0
11044.0
10,499.1
10)7 4.0
10 88 4.0
11371.0
11266.0
11247.)
11150.0
11177.0
11691.0
11341.0
11732.0
111 11.0
12171.0
12194.0
12672.0
121?3.0
12157.0
11239.0
11725.0
11754.)
12189.0
12268.0
12603.'
12180.0
12117.0
12827.0
12385.0
12302.0
11850.0
12291.0
12110.0
12111.0
11547.0
12606.0
13803.0
13627.0
13738.0
13911.0
1
11974.0
13133.0
11851.0
1156?.0
11988.0
13189.0
12941.0
12973.0
13026.0
130414.0
13160.0
3
11943.0
115140.0
11979.0
13156.0
12951.0
13014.)
13141.)
4
11741.0
11735.0
11746.0
1172..0
12304.0
12281.0
12222.0
12548.0
12275.0
12574.0
13175.0
2
Fig. 11.5
IIAXIUNt
0637.00000
.
....................
* ........ . . .
6ht 1
6702
6703
6704
6801
6802
6803
......... -- -- .. -- -- -- -- -- --
13911.0010
---- -0
-
MINIMUM=
CGNP =
YGNP =
ANP =
Gross National Product = control solution
Gross National Product = pro-cycle solution
Gross National Product = anti-cycle solution
MGNP
Gross National Product
movimg-average sol.
6804
*
.j
.
ON
.MN
._*.
TN
.
.PGN
.............
..........
0
a
*
aa0
0
0
0
0
0
0.0a00...
******
0..
.0*00*.
.
.
..
*
69C 1
6902
69C 3
6904
7001
7002
7003
7004
7101
7102
7 1C3
7104
7201
7202
7203
7204
73C 1
73C2
7303
7304
7401
7402
7403
7404
7501
7502
7503
7504
7601
7602
7603
7604
-s
235
Table 11.7
DCGNP=Differentials in GNP between control
and moving average solutions
PDCGNP=
MUCGNP=
DOGNP/CGNP
DCGNP/MIPI
DCGNP
MUGHP
PDCGNP
0*00000000000*00
6?
1
14d.eOU
131O.U00t
Id6.000
99.0000
80.0000
68.0000
S3. 000t)
6,.0000
62.0000
a
* 59.0U00
6102
67.0 3
6704
6801
6802
6803
6804
b901
61902
.6903
6904
7001
7002
7003
7004
7101
7102
7103
1104
7201
7202
7203
7204
7301
19-00000
102.000
101.000
*
*
*06
* 34 H6,L-Ul
-it I
* o ebe3
/4404 / 14t0-02
. 99 Nb /.-2
.13 V,8L-U I
. 124 /311-W'I
S
14 e5
* 43'.044
.43tUJV
.5e4npe
S!3b2290
293.000
*dd'4f 14t-UI
0410
le /t-11
. 240b20t-U 1
e,34
/It
-2
.J30114/.-U
.76
ie!
79 19j9
1
449.000
-34b833Y*-Ui
485.000
*2 .00OU
53d.* OU
.40M'.b11 -I
b39.000
52.00U
S350.000
584.00Q
b32.000.
6b/000U.0
68b.000
/12.000
'736.000
36
H L-012
.4kU
e 151.)0t-01i
I
.i
34. 1
9b
.912 lbd
*9 /ed 1 6
.9 It 141
1.. 0 05 1
1.0 13!
1i2099
I.21 b4d
1. 35052
1.3 l/bei
1
*.2b34 IL- -1
.4Ios3b1-
7404
.375,91
.
.231009t-U
425.000
40be000
/d9
.51fr9'41
-105286bt-U
26,.000
25.000
91b I UdV
t-Ui
* 1 f'062t-u 1
.2ib0biL-UI
* 32.000
392.000
7304
7401
7402
7403
/
116.000
S 352. 000
7302
730 3
7501
7502
7503
7504
7601
7602
7603
7604
139.000
*" /.0U0
0
9
.91U
* 14
.'.(J 92931-U I
.4319141-U 1.
.4I14I11-01
.5013491-U1
1.46944
1.5t6bdt
f34'Uf64
1 . 9641
I. 9U'd4
I .9l093I
* 2.11u1
.b182701-01
2.30421
9.5Vj6
*2
Fig. 11. 6
MINI MUM=U
Os......
*
O
(60103
O
6704
6d01
.590000000
g.e......
O*OO66@** @0 50000
360000000
~0ee0S9000O
DCGNP
e0seS*g*.6g.......
00.......
0900*e.
*O 0s*Oeee
0605
Differentials in GNP between control and
moving average solutions
0
O
5
0*.
S
5
6803
6d0'.4
0
690'.
0
0
S
S
0
*7001
'00i?
7003
10 04
7i01
S
S
0
S
floe
*
0
1103
O
0
O
S
S
S
*
0
71
7301
73oe
130.3
7304
7401
O
5.
O
5
O
S
O
S
O
0
O
O
S
-
*
S
O
0
O
C
1403
1'.04
7501
FS 02
7503
7504.
7601
7602
7603
.7604
*
S
O
0
*
0
*
S
O
*
0 __
'0
C-')
Table 11.7 - Disposable Income
Tw Control solution
Tn Anti-cycle sol.
MYDuMoving-average sol.
YYD=Pro-cyole solution
CYO
MYC
YY..
6 46. 0
6039.oo
638?.6o
643 (.80
6037.00
6379.61)
.
..........
.
b 0U ?
6781 .7
6774. 1t)
. 6979.og
7146.@o
69B3.Su
.
*
bat t
6704
b)(JJ
7434.00
.
73i1.Ic
.
1)1
(S
/('
31
*
8)81.
4' Jt.h
3I.'
9
.d)/b.90
141 1.C
v . . * ::0 1
h (I e I.') t
tit)1 -eu
600
k4
.
.0 0.83
1 U
0
0
. i)
j. /
39
..
/ de) 1
1
ht)IJ.)Ie'.4.0 b0 0
1. U
bj
/.480./I)
Me31
1HO*-it)
C'.)
d 1.1e -
I
.
.
933/I~.(0
o6.0
i(
J
'oin
C38fvl
1 I J0
1 (O
Ml 4 O .# 0
00
I 1)0
/- 0
/-. 1
10 16'.
0
0 '4
0
.90
91',".1.)
f)- -:1 on0
LO/h .P,0
9.3
1fU 1
/.%u1
N,1)e
4
H81
9jil)
*4'/4 b.v0
.9e.3o u
I~S U
.
.
9
9
41,41)0.OU
3.0
910.30
68$,.*20
9d/'(.e0
4~U
.0
/i
93j 1 *'50
tst
s *ti
8 Ic:14o.40
LU
'04#e ?._U
3 13. 1 0
6
IUo
;.0 U
?i P1 ) 4
d /) /.
14 o0
30
d8li'.
-)I'8.
0
.
U
91)A. o
IF. 00
103
(430
0094*4et
ci'.? e CJ
81,0
'i41<.8(3
*
1104
/4(14
1',3.3
to
f) e,*b)
-11 1 1I~
7JU2
103
13U4
14.0
11501I
8'O * 41)
/444/.
l"D#.8.- ,U
1?
o
* e1~t./(J
bJ61d
64
J. .* I U)~
86
I
I5
1004
1103
P).
/)
A
.90
/48.
V3
6
JI3.00
/f
1- 3e. 4 0
1OUR?
10
66(oo.h0
6031 .U
.
.
'
6458. o
6489.3u
6677.-80
b6101
70?
.
1)
237
eC'
1
s 1'-. e
'444.d 3
92960
/804
91!t)'5
10
.9f0's
9'4JC
10/
i2b 1 .30
'4
billions of 1963 lire
A
9t)
.O
238
Table 11.7 - Differentials between disposable income of
the control solution and moving-average
solution, DCYD
Year
and quarter
DCYD
6701
6702
6703
6704
6801
6802
6803
6804
6901
6902
6903
6904
7001
107
76
59
18
7
-4
3
7002
7003
7004
7101
7102
7103
7104
7201
7202
7203
7204
7301
7302
7303
7304
7401
7402
7403
7404
DCYD/DCGNP
18
.72
.55
.47
.18
.09
,06
.05
.03
-.03
,04
.29
.18
28
.26
54
81
98
.39
.49
.50
.50
.48
.53
.47
.47
.47
.53
.51
.53
.50
.53
.55
.47
.48
.45
.46
2
-2
-1
23
123
128
157
153
166
169
206
218
217
226
257
287
252
257
237
247
239
Year and quarter
7501
7502
7503
7504
7601
7602
7603
7604
DCYD
245
233
279
303
313
300
334
336
DCYD/DCGNP
.47
.44
.48
.48
.47
.44
.47
.46
Fig. 11.7
0.0056o1
MINIMUM=
MAAIMIJ4=
000/.9Q'1
........................ s............................---.@---SSOO-O-S---SO@O6@SSOO*O****
61 03
=
Differentials between disposable income
of control and movimg aberage solutions
*
DCYD
(Ij
6doe
bd 04
)0 I
.OCYA"
U0
3
7001
1003
71 01
113 e
S
1304
S
7,e 0 4
1401
1403
S30
1304
/303
S
S
1403
1
/,0
s
S
7,04
S
164)1
S
14,03
lb604
('3
.Is
0
.aa
..............................
5
.. 555.5...555
.5S.555
555
*
5
..
5
e
5
5 5
55.*.***
*5******.
******.
**
Fig. 11.8
Disposable income
ho04I.'~h09
MINIMAUM=I
*.e*O
9e
*. aS.S
*6 *6e
HAA 1-4114=
006m
0ge .0...
0 ..
...
..
.
......
0 0
10 1) 1? * 2,46 4
U 0S* 0
g..
0
.....
a00
control solution
MYD = moving average solution
CYD
=
YYD
= pr-yl
slto
AYD = anti-cycle solution
b Hi 1) 3
b -i 0
4
IOU I
1003
710(1
1142
1103J
*
0
*
0
*j
..
7 104
112
7103
1. .0 4
0
I
j
09q00000090000000a00000009
a
1) 4
1 40e
7
3)'
1I I
1604
.Is
242
Table 11.8
CCP= Control Solution
YCP= Pro-cycle Solution
billions of 1963 lire
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
MCP
YCP
ACP
5797.00
5847.00
5887.00
5957.00
6031.00
6134.00
6252.r0
6401.00
65(19.00.
6611.00
6798.00
6837.00
7026.00
7121.00
7207.00
726.0.00
7494.00
5774.00
5812.00
5846.00
5919.00
6001.C0
6109.00
6232.00
6395.00
6502.00
6607.00
6792.00
6829.00
7013.00
7102.00
7178.00
7218.00
7437.00
7310.00
7063.00
7189.00
7569.00
7527.00
7379.00
7661.00
7935.00
7901.00
7768.00
8082.00
8242.00
8173.00
7821.00
8173.00
5774.M0
5812.00
5772.00
.7392.00
7152.00
7289.00
7680.00
7647.00
7511.00
7805.0')
800d.00
8062.00
7940.00
8270.00
8434.00
8368.00
.
.
835.00
8435.00
8175.00
.
.
8028.00
8208.00
8563.00
8350.00
8373.00
8332.00
1
7848.00
8019.00
8363.00
8142.00
8152.00
8101.00
2
.
.
.
MCP= Moving-average sol.
ACP= Anti-cycle solution
CCP
8011.00
8.360. 00
8617.00
.
Private Consumptions
5846.00
5920.00
6001.00
6109.00
6233.m0
6396.00
6501.00
6603.00
6790.0l
6835.00
71016.00
7103.00
7181.00
7223.00
7437.00
7312.00
7066.00
7193.00
7572.00
7530.00
7381.00
7662.0
7948.f0
7010.00
7773.00
8983.n0
8251.00
8183.00
7831.00
8183.00
8440.00
8178.07853.00
8023.00
8372.00
8151.00
9160.00
R103.00
3
5811.00
5846.00
5922.00
6000.
)
6701
6702
6703
6704
6801
6802
6803
6804
6901
6q02
6903
6904
7001
7002
7003
7004
7101
7102
7103
7104
7201
7202
7203
7204
7301
7302
7303
7304
7401
7402
7403
7404
7501
7502
7503
7504
7601
7602
7603
7604
-
6107.01
6233.00
6399.0o'
6rf3.0)
.
660).00
6794.00
6831.0)
7010.00
7098.00
717.
7276.0')
7441.0'
7311.fl
7064.00
7193.00
7567.0n
7524.00
7380.00
7666.00
7936.00
7900.00
7769.00
8095.Pl
8257.0'
8191.0'
7835.00
8103.00
8447.0')
8184.00
7853.00
8021.00
8366.00
8145.0M
8152.00
8096.00
4
Fig. II.9
MINIMMIN
6701
6702
6703
6704
5772.01000
Private consumptions
=
MCP =
=
=
.CCP
*.YCP
6801.
6 80 2
.ACP
NAxrmumJ
8617.00000
control solution
moving-average solution
pro-cycle solution
anti-cycle solution
6803.
6804.
6901.
6902
6903
6904
7001
7002
7003
7004
7101
7102
71C3
7104
7201
7202
7203
7204
7301
7302
.
.
.
MCP
YCP
.
CCP
*
.
ACP
.
7303
7304
7401
74C2
7403
7404
75C1
::,
.
7601
76C2
.
7603
7604
.
.
7503
7504
.
7502*
0
00
00
60
000
a
0a
0
0
0
00
0a
000
0
00
00
0a
00
0a
000
a0
00
aI
244
Table 11.9 - Differentials between
Private Consumptions of the control
solution and of the moving-average solution,
DCCP.
PCCP=DCCP/CCP
MVCP.DCCP/MIPI
DCCP
Pccp
390t
h 101
b74I3-
h7(13
60 4
bUk I
p. -
.61/
0
20
M e.
7.
14.
1 . "14 t- -() U e
*4vi',t.
.310
001.I .)0')
)o I)
t0ou0
4se t--3
.1/
.46
leC
b.e 00 to1
S. to 0 (1(. o1
18. 00
19. 11111-)
89. u 1
uot
S7.
12. to' U0
130-d
4
741
/403
.26"'i i vti*
.1 '7(-+ I
I.
1t.-j
.76-v
.97,>ji4It -tie
.630u -14
.25
-733M.4
-
)s
-.39Jo
.ZZ/a,)it
120. 1)4))
.16 1 s 1t -
1
t88.ou0
u0
144.
44 '/
..IZ/I9-l-U1
t
161 . Ou
I Ia.0 () 0
.
to
(
'1
152.
219.00U
I 9T.oO
190.o1)
199
.2 o
tPJ0
/et,
* 3eb I W
.32 ,tje'
-uI 1
e-U I
Idit-i
.13
-U 1I
.2ZIih't
. ) ) -330 i to - (I I
.231 1ot- 1
j -- '4t-o
.)uU22
Zt I
19. 000
-23U0ft 3t.-U I
()11
.2214? 1 - o
200. -)( o0
. -2jo3263)t -o I
26R.UUU
.
221.oov
u
231
-26-144
billions'of 1963
lire
.a~e J:)t
-33
e'I(It-0 I I
/54)4
ISO.
I
-21u>
182.00 t)!))
/604
-1E6ol)Vt-0i
-tie
7l) 4
7603
.36' i'4..a-'a
-ue
.40/i
LiZ. UJilt)
187.00
7t. oe1
.1) t
.10
2'4t) -4rMt t.3
.70>
t1 -0 1
,
1301
I
*8
it -Uv
.11811r
89.-0U) U-(244 et -U
. 104
IC e 1
-88e et -') j
Ol t-0 ti
%
.
IOU'.
70
1V 3
1u
3t-
q22 1 19
-it -tie
.t)69
* 1 114 it. - I)
100)1
/
..
),I
-.)e
.18
b804
tv3i)I I
b9
.-
-5
35. 1 0 00
4 1.
38.u1ju0
MUcP
9)10-u oc _k
_-u
i
/C44t- I
75a 1)J
J
Fig. II.10
3.0000000
N1M =
.
6804
DCCP
=
differentials in private consumptions between
control and moving average solutions.
.
blue
e31.000000
MAAIMIJM=
/101
1103.
604
1
,
j 11
/d01
.
/104
DC
.
1601
.
/boC
.
/bOJ
.
/40J
16014
.
*60
0
0
0
6.
.S6
0
6
.
.
.
.
.
.
0
0
6
0
0
6
6
0
0
e
*
*
g
*
@
*
g
@
g
*
6
~
.
.o
IJ'
Table
11.10
TCINV=Total fixed investments, control solution
TMINV-.Total fixed investment, moving-average solution
RTINV=
PTINV-
TCINV - TMjr4V
DTINV/TCINV
MUINV-
DTINV/MIPI
billions of 1963 lire
TCINV
bIUI
6902
6903
6904
7001
/002
1003
1004
/101
/102
1103
1104
7201
17w)9.*00
I $ 3 I .00
I93d .00
2023.00
1956.00
2099.00
2223.00
1856.00
21 00.*00
2151.00
2309.00
2120.00
21 /0.00
2413.00
223H.00
2139.00
I le. 100
I 13b.00
18)41.00
2002.00
1620.00
1)458.00
1899.00
2015.00
/004.00
18#2.00
1901.00
2146.00
1953.00
22'.3.00
23,..0
1963. 00
2014.00
1303
130'.
2333.00
2353.)0
23'1.00
23 /5. 00
24 10.00
24 9
.00
24 15.00
2485.00
2301.00
2211/. 00
-
1S02
7503
2149.00
-1104
76016
2289.00
1602
2'.3b.00
1604
t*UINV
2334i00
2b00.U0
2043.00
2041.00
20 15. 0 0
234 1 .00
e1 35.0
2311.00
eI I.00
2119.00
20e2.00
1929.0 0
ltiI.00
1960.00
IV 19. 00
2090.00
4e 1. 00
2188.00
I
1.0 1 Oa
1. 000
I * 18
134
1.1t13s4
1.471
'8
1.29240
1.2613b
1.20994
1.13021
. 1on4139-2
ift.0vuv
-211.000
.120159
221.000
* 222.000
e2leuo
i
. de
i1t
.125'.5
21 .000
219.000
* 220.000
* 212.000
221.000
236. 000
t6
.I l94 /1
.1119
.10bC55
. 11241'.
1.10050
.
1 12.00
1536.00
1545.00
1551.00
154 1.00
1618.00
1/21.00
1202
720 3
120'.
I.01
1302
'1402
7403
74U4
PTINV
.10100
.994152-01
.12 /1'5
.115238
242.000
252.0 00
2.13.000
. I 13
1 12243
1.016000
1.00000
1. 0041,
.96)000
.950943
.851b52
.
2b3. 000
2b 1. 000
.110013
12/346
285.010
.13744/
294.*000
. 132412
29 1. 000
30 ).00
319.000
310.000
314.000
320 .00 0
325.10 0
335.
.131e66
.13334
.131 I
.133333
. 13'./3
.1I21 90,5
010
.135td2
12". 000
.19115
2.000
219.*000
-. 12s96 3
278?* 00
2994.000
329.000
iss. 000
3.000
.
70684
. 79381/2
.81210!3
.80139
./92308
.110 IsYS
.803109
.408b
.1442101,
.1337b29
. 165633
.332447
.844444
31)4.000
333.000
312.000
/9541,'
.803738
.792189
ds$.000
/
803
b804
6901
DTINV
-
14 4-7. U
1123.00
1P5b.00
b 104
I6)01
TWIN
*
*.861141,
.811811,
.*
2540
.13h6a9
.919753
.143/31
*99395w
1.04412
.11,2099
1416'.
.
134u0'.
.12'.d00
.*07767
1.0'474
247
Table II.11 - Total expenditure for machineries
and equipment: billions of lire
1963
CIMI=control solution
MIMI=moving-average solution
YIMI=pro-cycle solution
AIMI=anti-cycle solution
6701
6702
6703
6704
6801
6802
6003
6804
6901
6902
6903
6904
7001
7002
7003
7004
7101
7102
7103
7104
7201
7202
7203
7204
7301
7302
7303
73014
7401
7402
7403
7404
7501
7502
7503
7504.
7601
7602
7603
7604
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
0
.
.
.
.
.
0
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
CInI
Mimi
Y1111
683.000
668.000
529.000
484%000
458.000
455.000
478.000
485.000
485.0n!
502.000
540.000
564.0)0
572.000
424.000
962.0AO
622.000
668.000
526.000
478.nOr
460.000
460.000
476.100
484.000
487.000
505.000
669.000
678.0O
702.OCO
710.000
715.000
734.000
767.000
790.000
811.000
672.000
819.0CO
886.000
936.000
972.000
975.000
996.000
1104.00
996.000
1000.00
1155.00
1010.00
1082.00
1099.00
12214.00
1259.00
1284.00
1331.00
1357.00
1239.00
1204.00
1149.00
1111.00
1062.00
1011.00
1069.00
1154.00
1209.00
1228.00
1
714.000
717.000
732.COO
724.000
709.000
711.000
762.000
772.000
769.000
798.000
929.000
962.000
979.0"0
1C27.00
1062.00
969.000
948.000
912.000
877.000
812.000
742.000
775.000
872.000
941.000
982.000
2
AIMI
539.000
518.000
477.000
459.000
468.000
461.000
475.000
492.000
521.000
529.000
574.000
573.000
586.000
529.010
467.nn0
558.'Y'o
622.0C0
687.000
738.0.00
701.000
74 1.000
749.0'0
733.000
723.n00
777.000
780.000
766.000
885.i0m
953.000
963.'%0
962.00'
170.0
1089.00
43A.000
53.00i
983.000
906.00n
60r.000
691.000
764.0)0
726.000
729.000
738.000
74r.000
679.000
746.000
79q.000
809.000
788.000
916.000
979.000.
1"64.01
1089.00
1140.00
1006.00
946.000
920.000
875.000
867. 000
21.nlC
749.000
829.000
912.000
966.000
968.000
3
803.000
754.000
811.000
91n.000
963.000979.000
4
995.000
Fig. II. U
.
6703
.MIMI
.
6802
.
6803
6804
6901
6902
424.000000
Investment expenditure for
machiriery and equipment
mAXI
1357.OOO0f
CIMI = control solution
= moving average solution
solution
YIMI =pro-cycle
AIMI = anti-cycle solution
.
6704
6801
.
6702
.
6701
.
nMltIUNa
.
.
.
.
6903
6904
7001
7002
7003
70C4.71C1
7102
7103
7104
.
7201
CIMI
7202
7203
7204
7301
7302
7303
N*
.-
7304
7401
.
.
.
.
74C4
7501
7502
75C1
7504
7601
7602.
7603
7604
MM
.
7402
7403
-
.
.
-
.
.J
~ ~~~ ~~ ~ ~ ~ ~ ~ ~ 'og00gegegg Tge...gogggeggeggggggeo...O*.0000C*
gge*
~~~~
0
0
a0
Table 11.12
249
Total expenditure for Constructions:
CIC=control solution
MIC=moving-average solution
YIC=pro-cycle solution
AIC=anti-cycle solution
CIC
Pioc
.
962.000
96". COO
959. 000
.
.
.
.
.
.
.
.
.
.
.
.
1055.00
1087.00
1094.00
1067.00
1127.00
1052.00
1087.00
1096.00
1C9.00
1133.00
1236.00
1302.00
1196.00
132 3.00
1430.00
1052.00
.
.
.
.
.
.
.
.
.
1223.00
1289.00
1189.00
1:309.00
1412.00
1184.00
1281.00
1265.00
1332.00
1337.00
11415.00
.
1174.00
1409. ')
1242. CO
1139.00
1188.00
1274.CO
1251.00
.
1254.00
.
.
.
.
.
.
.
1131.00
.
.
6701
6702
6703
6704
6801
6802
6803
6804
6901
6902
6903
6904
7001
7002
7003
704
7101
7102
7103
7104
7201
7202
7203
7204
7301
7302
7303
7304
7401
7402
7403
7404
7501
7502
7503
7504
7601
7602
7603
7604
-
1116.00
1382.00
1139.00
1139.00
1237.00
1281.00
1152.00
1096.00
1087.00
1278.00
1265.00
1281.00
1276.00
1272.00
1
1196.00)
1296.00
1277.00
1347.00
1350.00
1145.00
1175.00
1422.00
1244.00
1134.00
1114.00
1273.00
1245.00
12115.00
1112.00
1C93.00
1362.00
11C8.00
13C9.0 0
1202.00
1241.0')
111n.00
1052.00
1039.00
1218.' 1)
1204.00
1218.00
1211.00
1206.00
2
billions of lire
AIC
1087.00
1096.00
1"69.00
1133.00
1236.00
1302.10
1 196.'0
1123.00
143 1.n0C
1197.00
1196.r00
1277.00
1347.00
1350.00
1145.00
1175.00
1422.00
1244.00
1133.00
1183.00
1272.00
1244.00
1245.Of)
1112-.00
11'9 1.l
1359. 1')
1108.0"
1308.00
1201.00
1239.00
1109.00
1.05 ..
1038.00
1217.00
1204.00
1218.00
1211.00
1205.00
1963
950. ooo
1052.00
1087.00
1096.10'
1069.00
1133.00
1236.00
1303.00
1196.00
11 3n.0')
1431.09
11 n6. 0
1295.00
1277.00
1347.00
1351.00
1146.M0
1175.00
1421 .)0)
1214.001
1133.00
1183.00
1272.00
1245.00
1245.00
1111.00
1093.00
1362.00
1110.00
1308.O0
1201.00
1238.00
1106.00
1049.00
1935.00
1212.00
1199.00
1213.00
1205.00
1199.00
4
K.
Fig.UZ.12
Investment expenditure for
959.000000
MAXIMUM
AIhs
constructions
-
.
................................-.
6701
6702.
6703 .
6704 .
6801 -
CIC =
MIC =
YIC =
AIC'=
---
--
-****
-
1431.00000
13.000
*...000000
control solution
moving average solution
pro-cycle solution
anti-cycle solution.
6802
680 3
6004
6901
6902
6903
6904
7001
7002
7003
7001
7101
7102
7103
7201
.
710'4
7202
7203
72011
7301
7404
YIC"
I
.
.
0
---
-----..
.
7303
7304
7401
7402
7403
7501
7502
7503
7504
7601
.
0
.
.
*
7602
7603
7604.
.
.
.
.................-....---............-......
*
....
''****** .. ***..*.*....*.*
-
0
251
Table 11.13
-
Capital Stock in Manufacturing
Industries:
CKINV=Control solution
MKINV=Moving average solution
YKINV=Pro-cycle solution
AKINV=Anti-cycle solution
CKitiv
MKI1 Y
AK IV
YKINV
.0.0.0.000000
*
le,4 3 9.0
15.434.'.
Ilbd3.d
*039. 0
16040.b
S 1#1 4.0
1bb3U .0
I t) 0 j -4, 0
6704
10090.3
-61401
161)1.5
1 h )0 11.2
Ib5h. 1
* 1fI/1.6
1 It) 9Jbe
14 -341# e
14 3* / .0
1' iJ.
I
46e? a3
143,1
141 5t.
1
lisrod.e
13ee.u
14 1 3.0
1311U.4
159d5.3
I h43L . U
0
7103
7104
7201
7202
7203
ii40.e
1s9e4* 0
1 .
I3*
4
.
3ieo..I
IJ0b5i.5
j i9le41,22
1311
1 '-'3.3
13331.
iiiJ2b0
i e ife
13
Iiuela$
13 9 P*
-
13444.4
1 3)1
1401.
d bde Ii
1.e
139 (S.d
14119.3
14Jee. I
1439 /H.
140 I e 3
-
I
6
1864J.4
/
19(164.
195-0.
14? 1).b
19945.0
14J43.6 I
I4.43,. I
730,e
7303
7304
d0614*4
14-4 J4, e
14'/1.9
1441d.
1 454V9
14b49.M
-
/
7U204
7301
/
7001
7002
7003
7004
7101
A14
7401
7402
*3
7403
19 .1
e 3
10
./ /
750UJ
7502
153*d.
Io f /3. 0I
I / o1i. 3
7404
I/
1b I
.b
e
85d.4
e 19
/
1 (00o. J
I
4 3
I 0'U5.
dudiduli
.t
tib
7504
7601
7602
7603
7604
14 e4
1441 /4
1
6404
-
I
-
t903
dVQ 3
314.3
15,1.9
160 -ft .q
bkt04
f390 I
4/.4
1b/
*
*0
67ue
d63,10.'.
*
6b40.J
d*21d
19)4.4.0
e2d /1 .9
2
billions of lire
1.1
20bb
li e I~s
/e.4 I
d04e0. I
e0t,91,.,
4
Fig.I.13
*100
0@e*O*@g00000000e...0...0
MAXIMUMS'.
n Manufacturings
@*OPOSOOO@O0g@...........0e*
26921.7969-
geoggggg-ef e 0~*e 0............
.
**
b6i02
*
0
$
.
p
.
.
S
a
0
.
* 6d03
6804
6oi
St
e
-
6/1 1
6102
6103
6704
Capital Stock
13028.7969
MINIMUM=
69') 1
0
6 1 1)4j
6904
7001
.p
4
-
7002
1003
7004
7101
7 102
.*
7103
e
7104
140J
14.04
0
a
*
*
"I
o
0
*
NbN
0.
0
-
0
e
MKINV
POr I
Ib 1
1502
lbole
1504
*7602
--
!b
C
0
YKINV
AKINV-
C
0
N-)
Jb03
7604
*
*
o
*
7301
1302
1303
7304
1-401
e
*
1201
7202
1203
1204
g~e geeggeceg
e.es...0
..
.
.
..
.
0........
0 0 0 gs 0 O's 0.g em......0 . g e 0.00 0 0 e g e g... ee
e e e e 0 eoe
253
Table 11.14 - Index of Capacity Utilization:
CUTL=Control solution
?UTL=Moving-average solution
YUTL=Pro-cycle colution
KUTLmAnti-cycle solution
CUTL
*600
0
6703
6104
680 1
b$d
6803
604
6004
0
0
6
614o.00
851 .00
.4 /.t3UU
ble. 101
bC9m. 2i0 0
4t)
0
0
-
0
08,e.80 U
69o 3
6904
0
S
88d0300
82be.j0p
8 /b e-400
d110600
70U1
0
924.900
91boeUo
7002
0
7003
0
7004
S
9130 * S
90
1. too
/OU
901.
7103
7104
7201
a
7202
S
7203
S
0
0
811.300
a
/6.90V
921.,900
90, .0 0 U
$84.5bt
tSIJ*bO
911.000
-9P6*b0U
9'0
1
9314
U0 U
9.3JUOU
0
8 13.600
11y0
8
.0
8e1.-Ut)
93 d* 00
.800
813*100
bt.90OU
8 1 e0 0 0
- 30.30
91 . 300
YU'$.U
80e. 1)00
93. 100
3.0UU
93e.900
696.00
93 .000
91)10900
937.bo
u
915.*Yii
89e7.9.0 U
9bk.10U
b9f.40 0
9844.)0
13eeU
9e 6).
Yu3l.9UU
.150
1
9
100.090
U c 00
958.300
9.61.00
'0 Ut0
921.000
869.100
92b. IOU
901 * /00
96 3.500
0
92 10100
0
9'39.40U
95e. j0 U
9tb . 100
99Ued00
981 . ,0 t
7301
0
730ie
S
7303
7304
7401
7402
7403
1404
0
7501
750.e
7503
0
9t2i.800
90 I.b UU
910.800
0
86.00
0
d40.900
7504
0
860.300
7601
0
930
76U3
0
911 .000
7603
1604
Mi4.4*4LUU
'10.3.00
d 18. 01o
9*
bd3. eU0
d2-.30UU
0
0
?204
*
44 1 -
S
0
b.5b0
14. 300
6902
0
b14.4V
di 3-00v u.00
31..JUU
8b0 .0)U
84IdOU
851 0
04 0
6
AU'd. IL
84e.8 00
6701
AUIL
YUL
4U1L
.ee........
U
a
0
9bb. eduu
9e6.
0
d0
996.
v3* 300
931.900
Mbh. 100
941 -00
9e /le000
/00
936.900
9-4.6 0
4.100
9ti(J.bUU
ca8e.00U
40 U
961.9300
954.00
945. /00
2
* 444>0 JOU
930
600
933.00
4
stie00
841-30 0 45*9UU
864.900
H64.0o
94'*
9-e3.900
I u .901o)
IUU
432*4UU99-0
936. /IOU5.0
34
941*OUO
0
&0 0
4
Fig. 11.14
MIN~tUM3
03 491',b
0 0
00
6701
670Z
6703
6704
6801
$0--
6803
*0
04.OO
Index od capacity utilizationMAIM3
00S0
g0000
000
000
0 00
S060
0 0a
0 0 .0 0 0 0
0
00
0
a0 0
o0
*0
0
a
.0
U,
*
*MUTL
*YUTL
6902
7001
*0
*
1004.
7101
*
70032
7103 1
1103
1104
o
1203
1300
*0
*
1403
1404
71301
1500
*
.
P303
7604
255
also affects through the mark-up law, the determination of prices, and
it is also important in opening up export possibilities.
As we shall see leter, the contribution of government corporation
investments to accumulation and growth, to inflation and BOP control
seems to work through such a channel.
However, for lack of data, the
index of capacity utilization is limited to the manufacturing sectors.
It is given by the ratio of value added to the stock of-capital within
such industries.
From the results presented in Table and Figure 11.14,
the two sides
of an investment expenditure can very clearly be analyzed.
The first impact is given by their expenditure effect, which implies a higher level of utilization of the existing capacity.
During the
1 9 7 0's therefore, lack of Government Corporation investment would have
led to a much lower level of activity.
However, once an investment is
incorporated, it becomes an addition to the production capacity.
This
effect may then prevail over the multiplier effects on demand and can
lead the index of capacity utilization down.
This process is shown very clearly in Figure 11.14, where for the
period 1970-75 the level of capacity utilization would have been much
higher than the historical one, which includes actual Government Corporation additions to capital stock.
3.
The Effects on Employment
Employment, dependent on the level of demand and productivity, is
considered an endogenous variable in the model.
To consider employment
behavior within the manufacturing, construction and service sectors, three
256
different functions have been introduced.
Interestingly, the results shown in the model differ from official
statistics.
In recent years it has become increasingly difficult to lay
off workers in Italy.
Indeed, lay-offs and firings are strictly regulat-
ed by recent legislation.
In many cases, as an alternative to lay-offs,
workers remain employed and are paid by a national fund (Cassa Integrazione Guadagni).
Therefore,
the wide demand cycles of recent years are
not registered by the official data on unemployment.
In our model the level of employment is computed by the ratio
between total worked hours and average worked hours per employee.
Thus,
we arrive at a more meaningful measure of unemployment.
The major effect produced by Government Corporation investment on
the level of employment is within the manufacturing sector.
As shown in
Table 11.15, this impact has consistently increased, reaching 200,000 to
250,000 units of employees activated by Government Corporation expenditure out of a total of 5.62 million employees registered in the last
quarter considered.
Government Corporation investments have had a much smaller impact
on employment in the construction industry.
Table and Figure 11.16 show
how declining employment levels in the construction industry have closely
followed declining levels of activity.
Indeed, over three hundred thousand units have been lost over the
last six years, from a peak of 1.8 million in 1970 down to 1.5 million
in 1976.
Government Corporation investments seem to have had the peculiar
impact of further depressing the levels of employment in the construction
257
sector in 1969-70.
After that date they show an increasingly positive
contribution until the peak reached in 1975-76, with over 50,000 jobs
activated.
The service sector, on the other hand, registers a very light reaction to the demand shock due to government corporation investments.
Both the control and the moving-average solutions give very similar
results.
(See Figure 11.17).
The above levels of employment can now be compared to the available labor force to obtain an estimate of the rate of unemployment.
A sharp decrease of this rate is shown in Table 11.18.
From a
level of 9 percent in 1967, it falls to a minimum of 2.9 percent in the
last quarter of 1974.
The most rapid decrease is reported in the strong
recovery of 1973-74 when the rate dropped by more than two points in a
few quarters.
Since 1974, however, the rate of unemployment has increased, and
only a light improvement was registered during the 1976 recovery.
As we already pointed out, such a profile seems to be barely related to the conditions on production and growth.
Unfortunately, Italian
data are quite poor and they have to be considered with some caution.
One further structural change, which cannot be fully understood by
the series we present, has to be mentioned.
While the total rate of unemployment has consistently decreased,
its distribution over different age classes has widened.
The constraints
in the labor market make it very difficult for a worker to lose his job,
but also make it very difficult for newcomers to find them.
Therefore,
258
while the aggregate rate of unemployment is not very high compared to
the rest of Europe, the peculiar concentration of unemployment among
workers under 30 years of age reveals an astonishing 17 percent rate
within this group.
Clearly this concentration entails
deep social
costs.
One further interesting effect results from government corporation
investments.
Until the end of 1972 the impact of government corporation
investment expenditure was to reduce the rate of unemployment by 1/2 to
1 percentage point; see LUA and
MUA in Table 11.18.
After 1972, the
unemployment rate would have been lower had it not been for government
corporation investments.
The first impact can easily be explained by the higher level of
production to supply new plant and machinery, activated by government
corporation demand.
Once these investments were incorporated, a higher
productivity has been produced.
Therefore, unemployment rates were also
increased.
Even if the model does not distinguish the behavioral decisions of
private and government corporations, the results we obtain from the simulations underline the effect that government corporation investments
have in pushing the whole system towards higher capital intensity.
Historical experience can confirm this situation, since Italian government corporations are more heavily represented in capital-intensive
sectors, such as oil and steel, and their investments are usually in
large scale plants.
Table 11.15
-
259
Total Employment, Manufacturing Industries
usands of units
= Control solution
MLIMA= Moving average solution
YLIMA= Pro-cycle solution
ALIMA= Anti-cycle solution
CL IMA
000,01,000.e~e
00.0000000004
0
462f .Su
*
*
6804
6901
6902
6903
6904
IOU I
* 7002
7003
700'.
1101
7102
7103
7104
a
462*. Ifs
0
'46 29.20
4 b3 4.30
0
4642.00
46164.90
4'5)'3. 10
S
4 /21
S
0
0
0
S
7502
7503
7504
40
4439.4U)
5031. 10
0
5142. i-)
515.) *0 0
4 / J0
*
0
46 /0 .40
'4Cj.b 10b
49I*40
10
"44.
49,U.40
4'M
S
0
5319.10
0
S 3 t).3 0
W.) 9.0
51 /'9. 40
0
0
S
S
5413.40
0
5502.bo
S
5i0. eu
5442.60
S
55U5.0
0
5t
e II
46 .10
0
7603
',0h4.40
50*9. .30
tebb.00
55e3.80
'-16
/t.
1
4b19.eO
'4t IS.9*
4*
4 1 lj.Pil40U
4194. sf,
et)
49 //e. 4.90
46
49 1:).e9o
491.9
491 .ie j,
1310t
49t6b.40.
4999.00
bu
L
b50 ".3
14)U
!10 0~ t4)
b100.0
'D I " .. ) 0
t2de. 0
Sd3b.dU
I Id.00
3I* .40
529b.
1,414.00
*31 10
2
/0
be g9. 1)
Se'*,. /0
5e9 .ou
Se'1 *.0I
st'6 1.50.
1I /. 3i
3,19'..5 s
se9i. 10
Ieb i.
3d .00
5586.40
V
5041.30
50db *0)
10
'0.
to
50 0.
t,1*1 3.du
:)I i'.00
Sd.Ii.40
5545.80
.bO
491 .30
.4 4 0
10
0
4/30.*4
4$ ld.ei)
/60
lte /o. 30
5b2 1.30
'4. J0
4f 1
41
34.90
t)0't)
5509.10
52 1.*';0
'.131. 10
bU44 , 10
t)U44 .20
s160.90
0
S
45 i9.od
j 6*10
10
4t,4:3.*:)U
I U
4b4
L+9 4.
bU / 1.40
30
1+546.o3 0
4.543.
/ . 30
iu
5456.
-
S
.)O
446*
4t)61
H
b1!l. 10
520 ?.27
5233.80
5243.30
52db.10
52 d. I0
S
*
10
49'i$.
50 1 .50
,5i i . 30
0
7604
4'd32.
0
0
7202
7203
7204
7404
4 1 6.90
4Yi* 1U
S
0
7301
7302
7303
7304
740 1
7402
* 7403
'4bl1 .bO
4t3 /4. a 90
.60
4b64
54
*
6 703
6704
6801
6802
456o.90
45o1 .30
H
454 I .
,
0
46 1.60
4616. 90
401)1.e 0 U
0
AL 10 4
YL iOA
ML IMA
b2b0.'0
.3
/U
* 2240
5355. 6,I
*4
Fig. 11.15
4531.d9922
MINIMUM
seee
Total employment in manufacturings
0...
e...... ........ ec. ceecese Oe@.eSe***,@0
seee
e@@*U**
e*.
iee~e.6.
.-
670
6703
. 9
6704
6801
.
-
.
-
.1
*
.
.
*
S
-
6802
6901
6902
ee
A
6701
N803
6804
5627.2968
MAX1MU=
6903
6904
7001
.
7Og
1003
.-
e
"
.
CLIA
1103
1104
.
.
7101
7101
* *
7004
e
IA
7201
1203
72
C
.YLIMA
ALIMA
*
*
7204
7301
7303
.
7302
7304
*
1401
7402
+*
*
.
*
.
-
1.01
1502
7103
1504
&
7404
*
103
7601
.
*
76034
-0
760
eee.,C
.e
0iegoee
eeeee..ee..se
s.ee.e gee
0eee.
eeSseOeCO
e0.e0
eCseeeseeeesee
261
Total Employment, Constructions
thousands of units
CLCA=control solution
MLCA=moving-average solution
YLCA=pro-cycle solution
ALCAnanti-cycle solution
-
Table I1.16
CLCA
ML CA
YLCA
AL CA
000000060000600000
6701
IoeD. 10
1 b.40
6703
6704
1642.50
1b6b .40
l636.90
1645.60
16 13.30
1,30-.50
1630.b0b
1640.10
1640gedo
10
. 10
ltaO. 10
1 108.00
1 108. 30
10 .b
1 /06.90
*40
I'7jt o 40
680 1
C
6802
6803
6804.
6901
b902
6903
6904
C
C
7001
-
7002
7003
C
7004
7101
7102
7103
7104
7201
7202
7203
7204
7301
7302
7303
7304
7401
7402
*
Ilb
?n I U J
16eb.l
162 I.60
1629.80
1631.40
b toe
740 3
7404
C
C
C
C.
C
C
C
0~
1501
7502
7503
7504
-C
7601
7602
7603
7604
C
1134.90
*111 6.30
Ilb.. .40
I /too
I1!,.3.dU
1749.50
b1760.30
1 76 1.40
1 124.40
b b91 a1.)
S61>5.50
11708.50
1668.10
164 1/U
1651).*20
bA
.H U
I 13'. 10
1
I
/
/'i.5O
/ae .60
iI -.)e*b0
I Itj.40
1I 12J.10
/dJ.bt)
16.3 5.10
I 31. 10
1706.8u
I /14. /0
17be.00
1763.bO
I I I.
/0
i.t'i
I1U,.DU
1ed. 10
1btd.40
1639.80
Ib b9. 90
lb4loUO
*30
1633. 30
1633.00
ltdS.4)0
it, 6.* 70
I625.9J
30
I.
151/d.10
1604.00
15 13.80
1592.50
1582. 0 0
1580.90
1548.90
1509.20
14 14.91U
148 1.5U
1493.00
1498.81)
1500.50
1498.90
3 1 0
540 .80
1563. 10
1''.,
10
it)i U. bO
1460i. 34)
1439.50
1,+41.40
1444.30
1443.50
1440.00
I11-.10
I fl.1U
1Io
1 35.31
1 P5d. /u
174).0 0 0
*1636. 30
164
Ib4i .o'J
I b40 0
Ib I0. 10
1 /b3.U0
1 124.t t
I looge.U
/?4.60
Ibsbib
1 7Nj. 10
1 i7,b.bU
h,9
1
102540
iueb.eu
f
.0 U
1 11.d')
1 1e4.1)
Io93. 10
I
fl'4eb1
1 lot). Ii)
1bol t.o
1639.00
1040*00
1634. 30
1Cdo
50
S6L ..10
15.490
1548. d
15t3. eo
1549. 00
154,.> 0
1564. 10
51 *3.U
I, 1') .30 U
14h I o8U
1431 .5U
14 3. '0
1441.eu
1444.40
1.10 .10
l4bb.-90
1'.d9.U0
1" 3b. 90
143d.50
1441.30
1443.80
14Jy.9
1440. eO
143b.10
15"6.00
'4
I.16
Fig.
Total umployment in construction
6904
1001
1002
7003
7004
7101
7102
1103
1104
7201
720
7203
.
*
.
.0
0
0
.
.0
e
-
.
*
690.e
6903
*.*
.
.0LC
0
-
0
0
.
.0
.*
.
e
*
6804
6901
1718.79980
.
6701
6702
6703
6704
6801
680d
6803
MAAIMUr4z
1429900000
MINIMUM
0
1204
7301
7302
7303
-7304
1403
1404
7501
*
.
.
*
7401
750e
6503
7504
7b01
760?
.
I~3
C'
-~
1b03
7604
00000,,0000000000000000000~000
.0a
s
s
e
s
e
s
e
e
e
s
e
e
s
e
e
000000
e
s
e
e
ee
*
*
*
*
*
*
*
e
s
e
s
e
s
e
s
e
e
e
e
e
s0
263
Table 11.17 - Total Employment, Services
CLSEA=control solution
MLSEA-moving-average -solution
YLSEA=pro -cycle solution
ALSEA=anti-cycle solution
thousands of units
CLSEA
*00
MLSEA
0*00000000000**
.0000*000*00000*
600060064000060
4431.10
44.16,40
6702
0
4464.10
44b3.40
b703
0
44k6.60
44
b?4
6701
'i'3b. 30
bet)
.ib
44b3.40
9 hU
44.0
4463.40
44db. t
4508.s 0
0
4501.40
4b08.50
4500.ob
68U 1
0
4530.bU
4533. 10
4533. e0
b802
0
0
4b1'4. 10
0
4614.91V
45 MC.40
4be'l. 70
459e.5U
W404
b901
0
4644. lU
6902
0
6903
0
6904.
0
7001
0
00d
46 /4 . -30.
.4
4 (:)?. I I U
4blseS62.
811
*
Oi
'.b6i3. 90
4 /2l) . 0
10. 30
4bgJ* 60
41
/(/.00,
48 L0.oO
4810 .bt)
14 l14 L JO
484
0
489.80
4
4909.1 0
41915.40
4915.0
S
493C. s O
4935.90
49 :>.90
4'153. 30
0'
495C. 40
4990.*d)
e
49,3.
49 .. 1 U
0
50 15.90
4949-2cU
U 11 .80
7203
0
50 35.4U
50
7204'
0
sob. 10
5U':v*. 30
0
5094.eo
50U
0
,IC'4. 00
3jtj. 10
0
51' 1.40
5111
51w'.8 Ii
0
0
513) I. 10
1*31.160
0
td 3 .d o
5e ) 3.0
!
. 00
72U2.
7301
73V2
7303
7304
7"0 1
7402
7403
7404+
7501
7503
'7504
760-1
0
t .')
0
0
i / *0
464f&4U
482 9 , 4(J
50 11
.6b
14 t3.51)
4obo
* . 30
* 4
4691*'3U
4913*>. e
4916- 10
130 1 1.
) - d*eei
5U55. 11)
.4988b.
. 90
5108. t0
51?d.50
IC)
5IU6.ju
5ele- 30
Slu, /.30
13181 .bU
5e08.00
,edd.C
5b 3.00
0-
5Q 34.*90
53d0.d0
0
S344.90
Sd yi3.50
0
5342. 0 0
3dj
0*
536J.2u
1.00
7602
0
5406'. 80
5443. 30
tsellb.b/0
7603
7604
0,
5419.60
t 4i'je
0
5513090
0
~
.
'40 4
47 1U.ki0
-
7103
7104
0*
13901JI
14
0
7004
7101
0
4b,34 a i)U
4 139.eeU
e
,47 1.
4199051)
4831)0 .b
4H5M.IU
7003
434e.eU
4be1. ill
4 /Ie0bU
4t)'neI * 3 0
4Thd1.10
476 / O
ALSEA
YLSEA
000000000000
5 4
48.7
2
10,
10
ble9 I.e
0
28.40
J40
5355.4e3.
t
541V.e0
54l7 30
!2'+
b'441900
190
Fig. 11.17
Total employment, services
X
14
Y1,iS13e 19-544
700
6
4
0
61) 14
1.
0
N
0
e
Iho)
(I')JA
0
a0
aa0..
.......
'900
a000
0000000.
0000000
265
Table 11.18 - Unemployment Rate:
CUA=
MUA=
YUA=
HA=
CUA
*
6$01
9.40000
9.50000
9.70000
6802
9.50000
6703
*
6704
6804
b901
*
6,902
*
C
*
*
*
*
*
S
9.30000
9.00000
*.10000
9.91000
t.200t00
9.30000
be 10000
9.00000
1. 30000
I .91)000
7201
7202
7203
*
0
7403
7404
*
*
*
*
*
C
7502
* 750 3
7504
7601
7602
7603
7604
.90000
5.800l0
5.50000
.5.110o0I
7301
7302
7303
7402
6..00000
5. 10000
1204
1304
7401
1.OOO~o
f 60OU0
7.30000
7.00000
.00U00
6.b0000
adoooo
6
.4000
*
*
*
*
*
*
*
5.200 ou
5 00000
4.e0000
4.200u0
3.30000
3.c?0000
. )0000
3.i10oOU
1
3.50000
4.110000
4.e0000
4.10000
4.2?000
4.00000
3.50000
AVA
lo. 1000
10.1000
10. OU
10.1000
* .0.0000
10.100)
-10.3000
10. '000
10.600
10.4000
10. 1000
9.0 U0
9.IU0100
d. 10000
9.00000
d.30000
10.4000
10.bO0u
10 * 000
10.sOOO
10.1000
9.90000
9.40000
d.bOU0Q
9.00000
$.30000
/.90000
I*90000
*40000
%.000OU
/.30000
'3.41H)00
e.
1+)000
1.)O000
,.40000
8.0000
b.90000
-5-t.,l000
'5. '0000
5.
. 31000
I000
4.4%3t))00
1) 010U
. 0000
4. 11000
3. l(J00
4. 0000
3. 6000)0
4.00000,
2.0?a00 00
(
7004
7101
7102
1103
7104.
09. 000
10.1000
10.3000
10. 000
10.6000
10.'.') 00,
1.10 00
b903
7001
7002
7003
I*1.000
9.90000
9.530000
.*
6702
YUA
MVA
-
b701
control solution
moving average solution
pro -cycle solution
anti-cycle solution
0000
J.. 10000
4.11000
JO-YO000
*-00)-U
3,. /OO 00
5.10000
t5000
5.41000
r.*OO0U
s. 40000
4. p1000
.bOOOU
04./000
4.10000
4.2, 0000
d. 0000
d.,0000I
2. 30010
O.50000
3.4)0000
3. dO000
4. 00000
-4.00000
304o
4.eO000
4*
10000
4.
J.
/0000
3.10000
6.30000
b.00000
3.50u000
5. 10o00.
5.60000
5.50 0 00
5.40000
4.9000
4.4000)
4.80000
4.50000
.3.b0000
eSouO
4.50000
e.50000
e *i?00U00
e.400UO
e.oooou
4.0000
4.00000
4. 00000
4.30000
10U00
4.40000
4.0
Fig. 11.18
INII fzUnemployment
0000
rate
iz
04A
Iil
94
0 0 0 0 00 0
000q*000e0.................................a..................................00
k -03A
v
6903
U
*U
6904
loci)1
l1I~t~
0WOW
oId
leOOO
1004
1-4
. 0-.
1141)e
inoe1
0
fhf)~
le,(V~s
ON
267
4.
4.1.
Prices, Wages and Distribution
The effects of government corporation investments on Italian
inflation
Since the oil crisis of 1973, the most puzzling problem facThe
ing all industrialized nations has been the control of inflation.
problem in Italy is particularly severe.
The huge increase in oil prices
found the Italian economy in a peculiar situation.
As we have already
seen, during the early 1970's, growth performance was very poor.
Never-
theless, because of the relevant increases in wages started in 1969, the
GNP deflator increased from 2.8 percent in 1968 to over 8 percent in
1972, the most relevant increase being due to the price index for construction.
Only at the end of 1972 did the Italian economy begin to
grow again at a significant rate.
Thus, the oil crisis fell on an al-
ready cost-inflation economy, and pushed the rate of inflation up to
over 20 percent.
Since that time, despite the tight control on demand and the
fluctuations in production, inflation has never been kept below 15 percent.
As can be seen from the consumer price index, Table 11.19, Column
B, even during the sharp decrease of final demand in 1975, when GNP
decreased by 3.75 percent in constant prices, the inflation rate remained
very high.
Then, the recent recovery of 1976 proved again that any con-
sistent demand shock easily pushes up the rate of inflation.
Three relations have to be stressed here.
First, within the do-
mestic price structure, the rate of increase of the investment goods deflator has usually been lower than the consumption price index.
Second,
268
the increase in construction prices has been higher than the deflator for
purchases of machinery and equipment.
Third, import-export prices show-
wide differences from domestic prices.
In the early 1970's they were
Export prices were lower because of the constraints of interna-
lower.
tional competition.
Import prices were lower because of the lower infla-
tion rates among Italy's major trading partners.
This situation was completely reversed in 1973, when
the
prices of Italian exports rose by over 20 percent and 40 percent respectively.
These increases were a consequence of the huge increase in
unit costs.
sharply.
Loss of competitiveness led the Italian lira to devalue
As an immediate and direct consequence, the prices of imports
increased by a percentage higher than the one for exports.
For an open economy like Italy's, it is very difficult to control
foreign accounts' deficits through exchange devaluation.
Even in the
recent experience of 1976, the decrease in the value of the Italian lira
pushed up export flows, but gave in the meantime considerable support to
domestic inflation.
As shown in Table 11.19, import prices went up by
28 percent and helped push consumption prices up by over 20 percent.
Within this general framework,
the impact of Government Corporation
investments does not appear very significant.
they contributed to the increase in inflation.
In the first few years,
After 1971, however, as
a result of their contribution to the increase in production capacity,
they served to slow the rate of inflation by a slight amount.
they had a more significant impact on investment deflators.
the prices of machinery,
Clearly,
In fact,
equipment and construction would all have been
269
higher than the actual prices by 2 to 3 percent had government corporation investments not been made.
nif icant in 1976.
Even this impact, however, was insig-
270
Table II. 19
-
Inflation rates, annualend of year 1967-76
Deflator GNP
Y
M
Consumption
Prices
Y
M
Investment
MachineryExp
Y
E
D
C
B
A
Deflators
Construction.
M
Y
Export
Prices
M
Y
1968
2.80
1.74
1.92
1.81
2.01
1.77
2.33
1.31
-0.39
1969
3.62
3.87
2.59
2.67
0.93
0.41
4.34
4.18
1970
5.35
5.93
5.55
6.27
8.71
8.89
9.35
1971
6.94
7.08
6.38
6.27
5.85
5.20
1972
8.35
8.99
7.83
8.33
6.45
1973
15.10
16.29
15.56
16.50
1974
19.42
21.30
23.32
1975
14.08
16.74
1976
15.72
16.65
Import
Prices
M
-
.49
-1.87
3.34
3.45
3.34
9.35
4.17
5.05
4.16
8.85
8.58
5.47
5.99
6.74
6.54
10.40
11.05
4.40
4.88
2.32
20.43
21.90
24.34
27.06
19.62
20.41
28.41
24.87
36.71
39.80
31.44
36.60
41.38
42.44
54.80
13.41
15.58
11.67
14.91
14.13
18.08
1.03
2.66
2.18
20.84
21.62
14.05
14.90
18.40
28.35
2
12.8
17.78 L
271
Table 11.20 - GNP Deflators
control solution
=
moving-average solutionn
pro-cycle solution
anti-cycle solution
a 0 0 0 0 0 0,
.
6101
/
11/4.19
.
.
6104
ISH01
116r.6I)
.
I
.
.
Ol9..
12
69 U e
b 904
I!.u,
.I
0
0
6
*
0
0
+.
0U
[I 34 .90
11 /(.e'u
A 1Ii.90
10
1tM.
I et!'9 1)U
iI . U
1&IC.40
7001
I
1004
1/'(I
14
'.
I j3t.
t0
0
0
0,
0,
0
a
13U.2
'. :9))
1
.
1131
.
A o'4e1- J*0
114'4 +.JOJ
I4".
L *-9 0
LI.).
13b-. t90
le'e
1
I1156.
1
')
i1 /
1.'i
l
1104
,-
j e1). / o
140 1
/403
It4'l.aU0
1404
*
16Q3. 0
*
J 4- f *U)
..
i a/.2t
1692
I 1 1.
9 'J U
11/
ile..3J
0
/.1O0
o
3. 11)
.I
10
til1 1 it)
.00
10,
1 31
'*b
0.
'4 -.M-U
j
le 10.!) tio4
11
4
.0
de'44 * Au
o
*
d-4t1 ...41)
dj/I
e16i' 1 0
I II -t U
d'13/
19d4./.3(
1'4J ,.'9U
e t9-,
.. *40
e'#'.i
. 10
db 0 4.lC)
di / '0 .0
)'944.
e
/ -4 . 2 U
e6_-).40
2
0
'
. 10
.
0, 0
Ai1t6. M'
I 1 i
j44
t.oJ
730.3
.3,19
0
13 It IV
*#
.r ij dJ
14?0.40 .0
1,iI
jt31,. /t)
.
7h04
0
*
.
11)03
7s04
761 &,
0
4e)'
00
3 -
13 /(.6
.
1501
*l1P
1 90
(
t4.)0
131.
.
1 ?0 I
13 3
0
*
.
7104
1103
1201
?0 4
1 t2e
*
It'e t
/003
1101
1102
0
111.3.99
j(
/O. I0
1 1?4AI.Pjk
123?.10
A,?4I.eC
..
11
1 157. 1)
1162.
.
9
1157. 1''
A 156.+'o
i156.3 i
i 59...t.
.
( /3
t) 10
w,40 I
I167.
1156.5u
0
*
blul
APGtjP
YPGNP
4PGNP
CPGNP
I
U
d
*-
e9?4 . 00
e oi
ei ni+ - l)
30o
.3
4b/'.
1i
20'40
*
CPGNP
MPGNP
YPGNP
APGNP
Fig.II.19
MINIMUM
~
06 00 0* 00 00 00
.0 *
.@e00000600000000
.
.
.
29d?4oOOOOG
MA IMOJM
Deflators for GNPm
I b4.IY
.
.
.
.
.
.. 00 00 0
eo
o
oo
o
00
0
00
0
00
0
i1030
61041
61iO43
7004
0
7103.
?jI)014
714 1)4
1 4( )1
4
*'\
*
YPGNP
/Y)
ChP2
7604
MPGNP
'1%4'LAPGNP
NaSm~
273
Table 11.21 - Consumption Price Index, 1963=1000
CPC63=control solution
PC63=moving average solution
YPC63=pro-cycle solution
APC63=anti-cycle solution
MPLhJ
6701
63702
6703
0
0
1165.00
i1 kb.0LI
ll6b.40
S1b6.80
0
1186.00
11b .40
116.40
1166.20
I 1be00
I 16 ,..u
i16b. 0 0
1160.4
1166.eO
I 16b.2u
1183.10
0
1184.30
1183.0)
0*
1l88.b60
1186.40
11$6.3o
6803
61304
0*
690 1
0
118b. 10
I1139.80
1213.00
I1M4.40
1 1 I. 304
1210.0 0
1210 .t
6902
0
1231.60
6904
1238.20
6904
7001
1220.60
1233.40
7002
0
7003
7004
0
7
0
0
~ 101i
.0
0
7104
0
7201i
72u2
720 3
0
7214
0
0
*
3
APt"
6801
b802
71U2
710 3
*
ytIJ" j
O.0.a......*....
....
.....
.
.*....
)
CPLb.3
7302
7313
7304
1401
0
7402
7302
0
7403
7303
0
123 1.60
1281.00
1288.40
1 330 .10
1356. 10
135Y. 10
Ile Its o
1e19. 30
/.0
1 ev121.40
1291.10
Ie. 60
1343.40
1 3b)0
.90
13b4.80
12f,. 5U
1 334.50
13,0 .90
1464. 1 o
14b1.40
1491 .b
154.b6)
12I/. 10
1621j.o
1661.50
1b92. 10
1 108.20
I 131. 80
S1819.20
1914.10
201 i.u
1
2.31 1.40
2365.50
6 4.30
19,/. 20
14Uit.
/ll
5b4.bU
163.00
1?38.
1816. 10
19ilobo
0
20l
.
le1/()
.10
.ee d .40
240b.40
2'4 16.60
25 .30
0
0
2388.90
2540.20
2669.80
0
2661.60
2716.50
2886.80
-.
26u0 . 101
0*
1243.10
1.2 -41 0
1449.b
1418.00
Pi39.2U
160 1.40
2204.60
7602
7603
7604
I 19.10
.9
14?1 eu
1'4b I.bu
1491. 90
2106.50
7601
1234.90
I23 1.*00
123
40
*
1310.60
1394.10
141 . e 60
75 11
7504
0
12 3'
1 4/.90
1401 .b0
14e 1.00
7404
0
idei4. 30
I .1900
I184.4 0
I jj 'ge(
2069.90
J0bQ.60
2
e4 19e 6k
2511.6)
26 11 .80
260.090
28370.90
3
12 15.410
1291.40
129t. to
1334.90
161.40
13b5.
d0
I3 Jh ee 1)
1'.02.34
142 7.64
1461.81,
1492. 10
1555.40
162 1.o 1
I 31.60
1854.-It
19,6. 80
20 10.0
2I 3.40
2Cd9 -3t0
,4.1 I* d 0
2491
.00
2524.64)
ev6b 7. 1U
2823.80
2689.40
3071.00
4
Fig.II.20
Consumption price index,1963=1000
MINIMUM=~
hlJ
AA
11b6Uj*00U
O=
301l.0000
0.4
0P
fS9 (14
04
0
0
j
7304
74j01
1401
0
0
0
1,0
1101
0
7,03
.7604
**
*CPC63
MPC63.
Table 11.22 - Deflators for Investment
Expenditure for Machineries
and Equipments:
CPIMI*control solution
MPINI=moving-average solution
YPIMI=pro-cycle solution
APIMI=anti-cycle solution
1 .0d . 0 lei
I Udl ., i
I11)-' 1 0 I J
bIi 1014
4 I
10 .8It) U
1')#*.
U-4 .,i
I
1')/A./U
.
10. j(
i U.i11
1Ioui
10 U
f,'04
/001
/003
10
.
10
IU~'
Io"
1.,t)
i
)U
1oo
.
1 Q4. )U
1I'id.o'j
.
11r44.,U0
t0
/004
.
1ti r.
.
i
.
Ijte.
.
.40
I f..it)
I iI
I
j 14
.41
0'
1U6
1 It..iu
ILI.10
10 0.
I11,0.
U ),*4'
I)
i e>3
I QI'lI
1103
/201
1
/d 04
/301
/302
/303
f.
1.31f.ieI
.
1 4
/0
t 24/..ilj
.
1# 34
.
.
138(..It
ill
.
/.:
I
1 1,
I
U
- )t
'
/403
/404
1/,I I
/s03
/61
1.10
.
.
.
.
1-) .0 144
V r,.4 1
i /t 3.
iste~I
I
.o 11
Ir'a./1.,
Ii'e I
* 1'
11
d1I
t,. e It
&40'.-30
.'*)
6 ik;
I J-V
J *
e
w.0
.3
t~I
4t
* (311u
-
e4'
/
*
liDo
'03
1os .4/0
1104
.i?
011
iI46(.
I. dl)
cn~o
d',9r.4J
.
ie
eu
14/1
4~ 11
~i
Ic'
3 1
I tO
r.-a
1 40
Ii.2[.4
.
/10
.Q
/304
/402
4 .9
IC 1)--0.0o
'
/1)4
0'*'ii
t.
.4 I)
I1 4
/13
1 0')U *
/1.(
/0
ie
f10
1041 .40
I1U)4)110-6
I v
'. d
1. 10
.
103.
*
,-.U
10/3.40
Ua
11
1
I 10
wi.1 . I*'(
10
10
". e 0
te04
.
.
It i
t. '10
.
t80 3
it
l)2'.a
.
I
(
.
.
P
-
t,810 3
APIMI
'
14PIMI
C-n~o
fil
U
0d1 IU
1)
Ill
n
e) 04.)
d91)1u .1
d?,0o
iU'0
304.0
)
.
YP1I
CPIMI
*
.
275
I oI o
evi.
4
Fig.112
MINIMUM2
120*199 19b
Def lators; for. investment expenditure MAXiMMIm.*
29210O9985
for machinery and equipment.
6701.
6703,e
~
S
.
680e
6M103
68304
*
$
69~0e
6904
e<
7001
0
*
01
1002
1003*.
*
.
7004
1101
'1103
*
1104
o
1120e
0
1204
*
7504
.7601
5
.
*.
*..
i
.
.
1602
1603
7604
.
7502
1503.
6
o
e
*
7303
1304
14.01
1402
CPIMI
277
Table 11.23
-
Deflators, Investment Expenditure
for Constructions:
CPIC=control solution
MPIC=moving-average solution
YPIC=pro-cycle solution
APICanti-cycle solution
IC
CPIH
S
6811
0
6802
6803
6804
6901
692)
6903
1119.?0
0'~a
1i
Leo . 80
1131.70
115 ,.6
1193. 4
116.bO
1188.40
0
0
6904
7001
7002
7003
7004
7101
710U2
7103
1113.60
0
121 .6b
12-6. 10
iai /.10
124 3.90
S
0
130'3.0
0
1333690
0'
0
*0
0
1360.0u
1410.00
14!31.30
14 /b. oI
1410.60
.0
0
S
0
lb 16. 0 0
7403
7404
75111
S
22 1550
2422. a0
25b 18.
10
e6 11.40
2 h)9. 10
0
281.b0
2?953.0U
0
3049.00
0
,3265.60
0
3380.60
S
3444.40
7601
7602
7603
7604
1',b4.bU
*16, /.80
1
80.90
8 /9 - 40
2032.4U,
-
0
7503
75u4
133e. 10
1311.00
lb!,b.40
1856.b0
144. 30
3116.80
1.144.40
11 j.30
l.90
1i
00
..---
600.
6O50@...@
1143.O0
Iljd0t'0
1116.610
1110edu
I Ite 00
S12d.90
1121
1131.10
1 30
1191.0
I
20h
.70
11 N*490
0
1,31*40
auO
beh11
94.10
iew. to
18U e d
I ie3 1 090
I
1291.4U
1333.90
Lego0 .30
1335.60
131/3.4U
137/!.60
1403.00
1404).*-11
O0
140
141%9.90
4tbe90
1668.00
1791.10
66bI.it)
.30
.90
.
*0
7402
752
1db1
1591.60
1634060
73U2
7303
/304
1401
1 -0 .0 0
1
t) 9
I 11 */-30
i e3.90
I 39b.41)
*0
1 399.
14? 1 .40
1414.10
15013.60
7202
7203
7204
7301
1 34.8
1111.10
)
6 703
604
*1183.40
1144.)0
)
6702
11 ~l 1* 0 U
1164.60
118/. 30
116. 10
(
6701
AtRIC
YPIL
......
.....................
134'0.,et
1.9Y5.90
8te 10
18./
,e?4U. IU
ee.3, - wi
L40./O
e40be5U
e581
e.IU
d e bl -0 0
oem59.o80
e6glb.30
300/.90
30 /d
Jo350.50
i?39
* SI)
e514.?0
e5620
e'i'. 3.
et'9
1 0 8(
90
00
?460.00
j 19ft 10
f32 a do
440 5.
70
3525.h *d
596bb.50
2
9 0 o0
322 1 .0 I
3293.b0
3419./U
3446.bO
J540.50
3569.30
361U.usJ
j.
00
3640./0
4
01
Fig. 11.22
Deflator for investment expenditure-MA,
1 b.:99
....---
4
6.011,45
I.
in construction.
- --.
- -e**
s** -*
---
*
**
**.*
*
*
*
**
*
*
*
*
*
*
*
*
*
MIIMUM=
601
6104
6H~e
/00
CPIC
It k
71')
7 ~1
.
/103
.
*
(p02
0
.
Na
b2O3
.
MPIC
.
13si
0
.
1L6UJ
.
7'0'2.
.hOI
P63
-
7404
-
.3
.
74'J
*
7304.
/401
booe6a.a00000o~o@0
.
.
.
a.
.
00000600*000******
279
Table 11.24 - Export price index, 1963=100
MPXCSI=moving-average solution
CPXCSI=control solution
YPXCSI=pro -cycle solution
LPA CbI
......................
I2
OC *0 c
10eC.400
IOC.40
1 Oe.00
b2. 300
102.000
6802
6803
101. 00
101.900
10C. 500
6804
6901
6902
6903
6904
103.
104.500
-105.300
IOb.400
7001
1002
7003
7004
7101
7102
7103
7104
7201
7202
7203
7204
7301
7302
7303
7304
7401
7402
7403
7404
7 501
1502
1503
7504
7601
7602
7603
7604
/00
104.100
109. 100
111.600
1 13.C00
C
114.500
115. /00
116.00
101.900
101. 00
101 .0O
101.eOO
,
*....eeOeee
10 1.0*()
101 .100
-400
101 .400
102. 100
103. 00
I0u0.eoo
b2. 100
103. 300
104.CVO
104.900
106.100
10.000
1090300
I10.200
SI e.300
114.300
1 k.bIJ0
IJ9~JU0
l0b. 100
1O. 000
104e00
101
I 1.800
0'+.900
112.400
114.300
11.60 0
elI). 100
204.100
120,0
109 500
O 1.600
206.400
I13.100
100
12
236.600
e1u.800
eio. 100
23 .100
641.0 OO
e4. 100
243.100
d55.400
ds.
I Ab. 100
144.500
159. COO
e IO.C00
e I nlCoo
? 15. 100
e 0. 100
102.300
102.Ci0u
1012. dJ0
101.00
li1.500
101 .euo
J.01.'+0o
I1c'.L00
I03. Jut,
lO4.e0u
105. 000
100.000
10180+00
ieeoo
109.300
''o.eoo
115.*(00
jI . 90 0
116.000
204.300
120.800
jCQ.300
IC9. 0(0
C
1Je.3jO
I ue. eo
0000.
102.00
IOC. 300
IOC. COO
101. 90u
101 .00
10.400
i*90. 00
119. 300
C
e.
1020e oo
1 1.000
119.300+
12 . 30 0
1CC.l00
iebl.doo
IU.1)00
1j5. 100
14 1.t00
I ? 0 b00
1 9.00O
19,.00
110.000
-C
-#ACLAL
)
6 701
6702
6703
6704
6801
APXCSI=Anti-cycle solution
I 10..300
ieo.oUU
119.3)0
106 . 0U
III.-+00
I Ili* to0
ije.Oo
132.000
131a.000
14 1.500
I62.00
11-9. tOO
195. ,300
Io000
.e
C210. 300
C 1b. COO
CIS.
/tOO
evb. IOU
300
1o. 100
14?.,00
I I9. 00
195. 600
10 *00
ao0. iou
Cl6. 10 0
Clb. 300
2. 410U
900
I38. 900
49.000
256. Coo
Fig. 11.23
MINIMUM=
Export price index, 1963=100
j.y999
26.j99
MAXI4IJ
601. 3
6104
6802-
6W040
/10o
.e
.
lO0t
6 4 01
usl
/001
e)
*
.--
10 0 4
o
0
00
0
0
0
0
.
.0
0
0
0
0
0
.
.
..
.
.
.
.
.
0
0
.
7 00 3
/61)'.
.
.
-
-
1.31)
o
0
281
Table 11.25 -
Import Price Index, 1963-100
CPMCSI=control solution
MPMCSI=moving-average solution
YPMCSI=pro-cycle solution APMCSI=anti-cycle solution
:WMC3J
6701
0
103.0100
bl1)3
0
6704
0
6801
0
6802
0
6803
b804
0
6903
6904
0
0
7002
0
701)3
7004
7111
7102
S105.200
0
0
0
1202
1203
7.204
1301
1302
73)3
'314
1401
1402
*141)3
1404
7501
71502
75103
1504
7601
1602
7603
7604-
0
0
0
0
0
0
0
0
0
0
104.20)
104.100
0
11)3. I0u
a104.40 01
11)3. 100
04.'.00
lU4.2O0
I04
/ou) IO106.
i'+./0U
104.2000
11)4*100
104.100
104.10
104.i'1
104.000
11)s.0u0
106.300
106.30)0
10
4*10
106.301)
IU
019U
106.300
106.
106.
/too
11)8.e1)1)
111)00)1
110.400
111.40)
115.0000
11 1.eO1)
120 *30
119.400
120.300
121. 701)
123.10
128.50
00
140*400
151 .400
*165.11)0
-209.8 03
106. 100
I1)5..$0
1)5.1/01
700
101.20o
11 1.000
110 .400
S111.400
S112. 100
lh.0 00
11/.200
11 40-41)0
I20 * .100
1d17.321
Sleu.ioo
121.-/100
1.0 1)
i00
110.400
II e 0 0
UU
1
00
106.
7120.
ieI.000
1e1.00U
IeM.1) Uev.3o
ll )*400
IeI .IUU
.4
dO.
0
1.3. 100
128. s)O0
140.400
151.400
lbs9. l00
.140.40
140.400
151.4100
I65. 10
151.41)0
165.L
/u
J4.400
234.40
d46.000e46.0UU
2'.UJ
246.)1)1
246.001
246.00
25b.50V
238.001
25b. ,1)0
255.1)0
25,. 100
255.1M)
255.0 I
262-1100
d62.10U
262.10
25d.10
296.3100
0
;S I
106.0 610
0
0
iAs
Mid
106./00
234.400
0
115.201
1)3. /00
IU4.&400
120.000
1201
o
0*.* 0.0*
104.400
106.101
105.40U
112.11)0
-0
0
329.100
32.200
336.400
329.200
34.3)00
j3t). 00
el).04 tvO
.1i0o
2*9.021
296.eo1
328.3)
32$.3u0
33b.500
336.500
3
0+
-
CRICAS1
*00 0 0 0 0 *0 0 0 0 0 0
Fig.II.24
Imports price index, 1963=100
MINIMUM=
9
j03.f6
6103
f1f04
690
Eti )
I
I
*
'/ o J
b9f3 .
1)64*
-
1101e
(101
1103
1104
.
1203
I303 e
1301
e
.
C*
-
(.0 1
140e
1404e*
I
01 -3
1b**3
.
..
.
..
.
..
.
0*
..
.0 0000000a0000
e----ee
-ee****
*******
*******
***
************
f 91
4709
091
10,e 7 1
?0 " 1
*
.4
C, I
0
70 T
1011
PO01
06
/
f
I o(1/
T 0 14
I.
P 0(1/)
T 0J 19
0
0 000a00*0000* * ***00**0** 0
0000000000000.0.0000000000000
. 0.
*
00..
i
R661/* W90 I
0
=wnwlNIw
*sguTmqowvrnuv; T poppy OnV JOJ J0O1SjJO(a -KIIAd-
284
4.2
Wages, productivity and unit labor cost.
Important structural changes occurred in the Italian labor
market during the 1970's.
Beginning with the well-known "autummo caldo" (Hot-Autumn) of
1969, a long series of administrative regulations on the working day,
overtime, labor mobility within and between plants,
together with the
new wage indexation system of the Spring of 1975, have deeply modified
the Italian industrial relations system.
The growing rigidity of the
labor market is indicated by the steady decline in labor productivity
and also by the weak responses of firms to changes in the productive
cycle.
The huge and steady increase in wages, both monetary and real, is
shown in the first column of Table 11.26.
The annual rate of increase in
hourly wages has always been consistently high.
1973-74, wages rose by over 30 percent.
During the peak years of
Only in 1976 did this index show
a sharp decline in the rate of increase of wages, which went down to 12
percent.
Thus, the decline of output per man-hour contributed to the in-
crease in labor costs.
Indeed, productivity, while relatively high in
the early 1970's, became very poor in 1974-75, and only in 1976 showed
important gains.
However, the key for interpreting the huge increase in unit labor
costs shown in column "d" is the level of total worked hours.
The Government regulations, mentioned above, produced a sharp reduction in this index.
From a level of 1800-1850 man-hours per year in
late 1960's, the index fell to the surprisingly low figure of 1600 manhours per year in the mid 1970's.
285
Clearly, the productivity of industrial plant has been severely
affected by this decline.
The interpretation of the effects produced by
Government Corporation investments can be related to the above phenonemon.
As can be seen by comparing the path of the "control" solution and
the one obtained from the moving-average case, column (by) and (bM),
Government Corporation investments contributed to the decline in the
total amount of man-hours worked.
Of the 350 man-hours lost between 1969 and 1975, a little less
than one third would not have been lost had it not been for Government
Corporation investments.
Therefore, the contribution that such expenditure made in terms of
lower wages and a higher index for output-per-man-hour, has to be evaluated against lower levels of plant utilization.
Thus, a precise measure
of their effects cannot be adequately formulated.
However, a clearer
picture will perhaps emerge in the following section where the overall
output/capital ratio, labor-income and cash-flow/capital ratios are
considered.
286
Table 11. 26
Average hours
Index Hourly
Wages -%increasE Worked
Y
M
Y
Output per-man
hour, %increase
Y
M
M
Unit labor
cost, %increase
Y
M
Consumption Prices
for Wage-indexatior
Y
M
1968
4.40
3.31
1857
1861
7.35
6.78
-2.88
-3.30
1.92
1.81
1969
8.45
7.38
1816
1835
5.31
4.37
2.96
2.95
2.59
2.68
1970
16.03
15.37
1806
1869
9.58
3.40
7.96
11.48
5.55
6.27
1971
13.90
12.92
1695
1763
2.53
3.71
9.02
8.91
6.38
6.27
1972
19.35
20.05
1678
1762
8.31
7.27
10.15
12.36
7.84
8.33'
1973
29.67
32.56
1653
1748
6.68
6.37
21.67
24.60
15.58
16.50
1974
32.06
38.21
1616
1709
1.14
1.61
30.43
36.10
23.31
24.90
1975
24.25
29.18
1578
1664
-
.79
24.62
30.24
13.40
15.56
1976
11.80
11.58
1593
1680
11.62
12.01
.17
.44
19.36
20.17
.23
-
287
Table 11.27 - Hourly Wage:
CWA=control solution
MWA=moving-average solution
YWA-pro-cycle solution AWA=anti-cycle solution
MdA
CWA
0
6702
S
6103
6704
6801
*0
b802
0
6803
S
0
b404
b902
6903
6904
7001
7002
7003
7004
7101
'102
7103
7104
S
0
0
0
0
0
0
0
S
7402
7403
7404
7501
o
/.00
) /.o0
b
blo. 300
00
/0.0
bW.400
to/o.boo
5 fe. 9!0 U,''
510.400
5 /9.2ou
514.200
tot 0 600
591. 1 0
'j46.4UU
0
0
0
0
0
0
0
136
/.o00
0
7504
0
7601
7602
7603
7604
S
.b0U
5h31 /.0 eij
6bb.900
660. 00
bi/.600
b4'. 100
bed'.'00
644.'3UU
628.000
b4b.80U
660.800
113.400
691.800
b41 .400
b91. 100
(14200
114.eO
/ch.000
f. 1.00
td,.0
100 o
/1.
41.bOO
74,e.800
149.300
0
d42.bf)
853.400
81.t100
out.6Io
)
11./00
0
d0i.
/f)Q
820.000
bI/3.eoo
hU I .4J0
b535.U0
606bb.300
037. 000
f344.a U
b41. /0o
691. 900
1 14.euo
it) I edt,
195. 00
/2i5.100
8.000
O':3.300
34.o0U
9000,00
9202.1IO
80.500
1018.50
if 4/.80
1 98. 30
2141.300
'28t.90()
Ihbb0900
10 t6.l0
11/.30
94.000
989. 0bo
949. 000
94*k. CIO0
11
1064' UU
I V~d~bo
1bt
3 4e . a t
1448.00
6
16w56. e
rjet6.
11/44.10
1861/.30
2080.3U
I ~Ii :
Iu10 20
/3.i0
1e.30.b0
12,1/. 0
7,12. v)a
1-30)1.020
131o.60
1444.MO
it) 36. 10'
16 it) .90
1 w) no .LO0
14549.b0
i,.b. 00
iioe.ou
1121 .00
31u.5U
!448J I8. '30
/o
19 / 3.9u
-e111 . A
ee3o.70
ei6l.u0 ejlt.80
ILJM?.40
a'.re
*~t)
2J4t. 10
2244.50
144 1.31
0
0
,?$10400
.e1ou
: 7 3.0u
!37.800
56 I.6bt0
tI#).s400
1990-JU
7503
o 0.J00
'3b9 do 4)
'3".2 0 e
0
0
5/10.iW)
593500u
'bI1. 10
829.4P2 /1.00
0
U203
7e04
7301
7302
7303
7304
'7401
5i
AWA
2361@.80
2422 .90
etP4 /.o00
eb00
*4 0
dbb.
1 414o.90
1i
ev
t) le * 4Lu
eeb.
e(0 .30
d4I4..10
25bt5.6t)
'
6701
YWA
1...**...............so.0
00
2616.0.>
c2b'.e.0 0
FiHo.II. w
..
Hourly wages
u 1N1MU =
.14
..
..
0--..
..
.
..
..
..
..
..
.
..
.-
..
.-
IMAIMIbI=
-.
--
--
--
-
--
-
?b4b.00000
0006a0ee*-e*e-eee*******00
0*0*&
00a0 0000a 000*0
*00a6,0000
6101
*
603
6113
*
6104
.1
0,P)
05903
0
fool?
1003
.*
,11
.4
1104
I 3eI
13 (.
I 1 14
144 1e
140 1
1404
SL
01
1603
1b04
.
160 3
....
. . .. 0...
........
00
*0*0a
q*.. 0. .*. . .. *-
**.
.. *.
*
-000000*00*0*0
00
00
289
Table 11.28 - Average Worked Hours:
CQHA=cnntrol solution MQHA=moving average sol.
YQHA=pro-cycle solution AQHA=Anti-cycle solution
MANUFACTURINGS
0
6702
6703
6704
'.59 .6bO
459.300
0
680 1
6802
-
6803
6804
6901
6902
690 3
6904
7001
* 7002
4
0
460. bO
45 1. 900
0
0
7103
*
7202
7203
7204
7301
7302
7303
7304
0
'41'+.900
418.900
'.09.500
.200
'4 l
'13.
7403
7404
7501
0
7503
7504
7601
7602
7603
7604
425. 00 0
419.200
7402
1' l2
00
00
419. 700
0
7401
-
433.100
'.14.500
'.52.800
44b. 300
442.200
430.200
424.
420..
.7102
-
460.100
465. 100
4 10.000
464.300
1004
I104
1201
4b4.<e6
461.400
7003.
7101
4:)4.0bu
0
0 *S)1
41'.*300
409.800
4e*I
408s.2oo
400 . 200
39//.00
39 1.900
392. 1'))
391.200
395.810
'.03.000
442 .00
45.000
442.400
451 * 900
452.
4bU.200
459.900
460 .600
40 I *tPOO
413.000
4b6. 800
'460. 100
100
'45.
4b0 .00
4b.
100
461)00
40
e.6O U
,4 .200
4 1 200
4 10. 00
40t.
000
'.73.eo(
46i.
000
4
414 * 4*
440ab*0t
410.40
'4 / 0.*200
W) d. 40 U
0
458.400
.498)
46O.2J(
468 $0
414. /00
467 .401
4b6. /00
463. e00
'437.bUU
4 /0.000
47'..200
463.000
44h.400
44t.
44 0600
4 1.200
431. 100
444.800
439.P00
43,.
100
441.300
432.obOO
44.U *400
441 out$
,449. 000
300
4'12.200
300
441 .-500
'+3 1 400
,+37.600
444.100
439.200
'.65.200
44(.
100
440. 1 01)
431I * 0
431.900
443.01
43,. 0013
436.300
440. 300
'.38.800
441.000
431.300
439 .'.00
441.200
438*000
43S. 300
+3,. 100
431.200
4.3. 00
431.800
4?3.200
4U .400
433.dU0
430 *00
42?.100
419.300
418.100
412*9)0
410.100
432.d')0
41b.400
'.15.500
'4d4.200
420.-100
414.400
411 - 0
41 bb 0
(
6701
AQIA
YQ14A
MQHA
CQHA
4
e4* 900
391.900
396.500
419.600
395.300
41/*000
+1'
.200
2
'+33.800
'.24.500
'+14.400
416.64U
414.800
4
431 * 100
421.2 00
'41 1.900
'4jJJ
418.900
412.400
4 16 .400
416.SIJJ
415.000
Fig.II.27
Average worked hours
MINIMUM=
.31
1-
1.4b9-b
0 0 a ag~oe e*
* *. e e *0 0 0
*.
***.
630
***....0000000
0000
000
0000000
611)1own%,.
3
9~
7
"Wow
Jill
111dPool
C*AH
11,ji
ti 10
30lJ 3
~+
<
e
1 14
C
291
Table 11.29 - Output-per-man-hour, manufacturing
META=moving-average solution
CETA=control solution
YETA=pro-cycle solution AETA=anti-cycle solution
CETA
0 *.eee....
6801
6802
''6803
0
'0
6901
6902
6903
6904
7001
7002
1003
7004
7101
7102
1103
/104
720 1
7202
7203
1204
7301
7302
7303
1304
7401
7402
7403
7404
7501
7502
750j,
7504
7601.
7602.
7603
7604
0
0.
0
AETA
0 0.0*0
&00
0 00a0
*00
a0
00
I I d .11)
tuf( /.00
1161.90
Itlol l
1206.50
1e39. 0 0
122 70
Iad 1.90
1222.10
I244*80
12430
120.50
I1
ie.b10
122/.uO
12'.5.91)
1219.10
12t)0.50
I 99. 10
132'7. 10
135b.60
1.31b*o
6804
00
12?ol.0
0e0
8703
6704
00000....0 00
1403.40
142 ., o
142.0
1494. 0
1511 .50
ij -eo *, so
15b0.ob
1564.50
1591/.40
1b5I4.0
1585.80
160.. 10
1681 .30
16 14. bO
1669. .40
1 137.s o
1684.80
I1 92.50
1853.0
Idl 8. 00
140 3.60
1329.30
1349. 10
13 2. 20
1393.80
1it. 1 0,40
1'tp .00
1-r.40
14e f.bO
14 34 .0
1500 .90
14V2.l0U
14/tI.00
I in /.090
15.48. 10
I i 3, . 0
In9b.10
1544.90
IbeZ).40
16+2.60
1b69 /.90
-
8702
0
1271.60
1303.1 0
132.80
111d 7 1.00
1304.10
1330.90
1+ a6.0 U
13 0.0 0
139 3. 910
1391.00
0
1312 #d
1394.4 0
144-).50
144 1.)
1421.20
1428.90
4 31.00
1429.00
144 f.50
149'.10
1481.230
1494.2
1501 9 J
t)
1 *b
l
.10U
1b'51
153i /.0
159/.10
1564.40
1630 .1/0
1644. 41O
16 .90
1348.2U
1436.40
1501.50
1491.00
14 1d. 4 0
1494. 0
155.10- I
154b .20
154e.00
1604.90
1543.10
16e3. 90
/0
I11
b4 I..'10
/11 10
1 11.90
1906.90
In 13.90
18 /4.
/l
18960
1854.30
1842.10
1810.40
2038.10
20 33.00
2059.90
2061.10
1 /5.20
1 /24.70
I /25.40
1 /)1.40
1 lud.dfJ
1bd0.00
1 111.80
-1b/1.30
i805.b0
189') .30
lebh
191 /.40
I/bd.
1712.80
1734.80
J
,330
1 18.10
1
171e.6b
16
1. U
i do0
18 /
/.
,
6701
YETA
META
*0
1899.30
1919.40
.13
0
1131.90
1 1e I.80
1 151.430
1111.50
.8loodo
1881 .60
1875.00
1696.30
1918.90
0
fig. 11.28
Output per manhour, manufacturing.
0O*00000
MAAIMUMH
1187.U9985
MINIMUM&
...
.0.....
00..000000000
0000e
0
000000s 000e
000e****e
*e
***
**
**0000
0***
6101
.
*
*
.
.
*
S
0
.
1003
lU04
101
.
7h0d
.
103
7104
.
*
7001
.
b902*
6903
.
*h
0
0
.
.
*
*
0
201
CETA
.
1203
.
0
.*
-
.
.
-
.
7503
17504
7601
760i
*
1603
0
*
.
.
.
1403
1,404
7b04
***oo
.~
6804
6
.
0
0
-
730,2
7303
7304
7401
********
0
6I02
6103
6704
6$01
h802
7204
1301
2087.69995
0
293
Table 11.30 - Unit Labor Cost, Manufacturing
CCL=control solution
MCLwmoving-average solution
YCL-pro-cycle solution
ACL-anti-cycle solution
CCL
MCL
4$.
4. 1000
47.4000
4t.)0100
45.500G
45.5000
46. 7Ou
6103
0
46.2000
41M.61)00
4 1*.000
46. 6000
45.2000'
45.5000
45.3000
45.5000
'45.5010
46.000o
'45.*500
4'. *.1)00
to1)0 00U
'.14000
44.0000o
44.9000
4.4.0000
'.5.1)000
45.0000
46.5000
'.6. bQOO
46. 5000
46.20UU
45.1000
4s.ju00
6801
*6802
6803
6804
6901
6902
45.8000
0*
6903
6904
7001
7002
1003
7004
1101
102
C
0
0
0
7402
7502
53.421000
52.8000U
55. $000
58.1000
.58.6000
65.2000
0
0
000
'1/.3000
46.000
4:)a oot'o
I) 00
46.
45.4000
0
50.4000
50 .5000
50. 1000
54. 3000
54. 1000
4)i.50I0
50. 3000
50.5000'
50.9000'
55.
54.90'li
4.3000
0 0
513. 2000
*1/000
01. 1000
69.0000
45.1000
'44.0000
44.30)
44.4)00
4d3.500
46.000'
53.20)1)
5$. 2000
61 .bOOO
4#3.60 0
50.401)0
50.4000
5u.7I1v0
5 3i 40)
54. fUO)
54.9000
5121000
5!-4 U00
61.5o00
684000
b .6000
69.3000
61f. 1001)
143
IOU U U
12.1100
/2.200
71 .0001
11.3000
71.6000
16.'40(1(1
5 do
401
14,.0000
lb.J000
Ii4.*3100
4e.0100
d1 e4.U4
98.buo
106. 00
114.00
126.000
13'4. (0U
80.1000
1403
7404
00
53.1040
1302
1303
1304
1401
48*80
5t2.0000
.0
1104
1201
1202
72u3
1204
1301
44.2*000
43.9000
44.9000
46.5000
46.200
45.20)0
44.2000
4 1 2000
49.6000
7103
*
ACL
0
6104
*
-
6702
6701
-
YCL
88.'000
93.000(0
98. 10 00
101.300
75)3
113.500
1504
1601
7 602
7603
115.900
604
101.000
i
.0
00
014.4000
01. /U000
b1.0. 1000
life I11)0
112. 100
I23.-00
bd.1000
I.,000
131. 3000
'2*1..3000
105.00U
11 .400
144e. .34
104.,00
1
36.500
138. 1U0
127.0 J0
111 .400
140. 100
S
114.900
13'.. 100
0
116.100
135.900
2
130.400
134.600
136.400
3
132.000
136.400
137.u0o
4
0..@
O
eO
.0
O
SO
.....-..0000000
Fig.II.29
Unit labor cost, manufacturing
MINIMUMx
MAXIMUM=
43.899994
138.099991
6701
6703
6704
6801
.
e
.
e
6802
6803
6e304
6902
6903
6904
7001
*
-
7003
.
7002
1004
7101
7102
1103
.
e
7104
0
7201
1202
17?03
.
0
0
*-
1204
1301
.
0
730:
.
S
7303
.
0
7304
7401
740,1403
0
7501
.*
0
.
7,02
7!D03
7504
601
7602
7603
7604
*
7404.
.
0
.0
.
0
0
*
*
O
.
.
.
.
.
0
0
0
0
0
e
-
295
Table 11.31 - Consumption Price index computed
y,
the basket goods for wage indexation:
CPCS=control solution
MPCS=moving-average solution
YPCS-pro-cycle solution
APCS=anti-cycle solution
CPCS
6701
6 7 02
1
I 163.00
Ib'-)-
6.10J
1166.00
6104
1161.40
5
II184.
164.60
1*1
l *.40
6'304
6901
69U2
6903
6904
7001
7002
7003
7004
7101
7102
7103
7104
-
720 1
7202
1203
* 7204
730I
730L
7303
7304.
7401
7402
7403.
7404
7501
7502
7,)3
7504
7601
760 2
1603
7604
121 3.10)
*124 1.6)
-12311.20
1220.60
123.40
I2 13. 0 0
*12131.00
I 166.00
I 16.0 0
I 1o1.40
I 166.20
1163000
1186.40
1184.40
I 161 .30
Jeo1.90
YCS
11b6.Ut)
I 166.00
I 1b5.8i
I 16.40
I 165.40
I 183.00
IPba 4U
11'11.40
1114/.40
leO4uu
Ilie10
Id I4 .U'.1)U
1e34.00
1e91 . 10
1e91- 40
Lev"). fu
I e /t. 60
2i91 .40
Ile711 0
1333.!2
1364/0
1394.10
1411.60
140 1-!0
14e 1. 00
1461.40
1491.60
1 tl34.0
16e1 /10
140 1.1I
14di1 .e!
30
0.90
-166 1.t0
1be . 1 t)
1 108.20
I
11. 81)
1819.20
2106. 1)
2204.60
td311.40
2365.50
238H 090
251b. 10
2660.3)
*2 132.b0
2851 .40
I.
Ij234e4U
1*24J. (1)
.60
1364.80
14 It *.90
1 914. 10
201 7.30
I164*
Ic.34
1333.40
1601/.40
11.3.10
1.e 4 .91)
123b.9J
1216.9v
1330. 1 u
135,6. 10
1359.b O
14 Id.00
1439.20
11b6.20
Ie 19/.00
ieI1 9. 10
1288.40
1449.0
APCS
e0oU o. 70
131 1 0
1401.90
162 1.,20
1693.)1)
1 13".90
18b. 10
19! .60
el 10.60
*eeI.40
e.1 fe.'4l)
IV 0
22to
e41b.40
240l .80
e /b.60
d 08 30
e4 19.60
2511. 10
2640 .!70
eb4*. 10
eB04.00
edb. 10
4014.40
I'd 1 10 * 40)
1.j39. 9 0
1361.40
136!.40
1402.30
14 /.b0
1461 .00
14942.10
162? *0
1131.60
1 W .10
19S6.$0
eu10
*
6802
6803
"PCs
eek39 -50
e417.ii6
e491 0U0
223. 60
280'3.40
eb2e.40
.30 I!:t0 0
3034.lu
.4
f-
Fig.I1.30
Consumption price index for wage indexation
MINIMUM=
MAAIMMUt*
1165.00000
0 ....... .0.00 . .0.0.0 0 0.... . .. 06
3034.69995
000600S06 000 00000
0 0 *0.060096
6701
670e
6703
a.
.0g.....
0
6104
6$01
6802
0
6901
e
.
6803
6804
h9 03
.0
6904
7001
700e
7003
7004
*7101
7103
1104
1201
1202
1402
7403
0
0
40
.*
*
1203
1204
1A 01
1302
7303
1304
7401
.0
b*04
1504
1601
7602
1603
7604
0
'.0
.0
00000000
osooeooooo
.00000.0.0000.0
00.000
e
000e-e0eee***e.***
00*0*******0*00*****0***0*
297
4.3
Distribution
The poor performance of the Italian economy, combined with
the deep changes in the labor-market, and the huge increase in real wages
have produced the most relevant income redistribution ever experienced
in an industrial country.
Unfortunately the inadequate official data on income distribution
in Italy, which considers only labor and non-labor income shares, do not
provide the necessary analytic framework to investigate income distribution among the primary factors.
However, from the model we used, several
interesting considerations can be made about the performance of the manufacturing sector.
Table 11.32 reports the series of value added in manufacturing,
and the output/capital ratios for the two main simulations.
As can be
seen from the series CVIMP, the output/capital ratio increased from a
level of 15 percent at the beginning of 1967 to 21 percent during 1970.
After that time, however, it began a continuous decline reaching the
level of 15 percent in 1975.
In 1976, a light gain occurred.
A complete
absence of Government Corporation investments would have produced consistently higher ratios.
(See the column referring to the variable MVINP,
and also Figure 11.31).
Indeed, under this case, the output/capital ratio for manufacturing
would have been higher by one half percentage point
in the early 1970's
and by over 4 to 5 percentage points in more recent years.
Thus, Government Corporation expenditure on investment goods has
contributed to the growth of domestic production.
But, once such invest-
ments have been incorporated into new plants, they have resulted in low
298
output/capital ratios.
plant utilization.
And these low ratios seem to be due to lower
Indeed, the differentials in the ratios mean an in-
crease in the stock of capital proportionally greater than the addition
to production of goods and services.
Within this framework, the redistribution of income in the Italian
economy, can be more easily explained.
First, however, let us consider
the different profiles calculated for the main income shares:
labor-
income and cash-flows.
Table 11.37 and Figure 11.36 report the total amounts of laborincome for the whole system.
One impressive result is that from 1973
onwards, the level of labor-income would have been considerably higher
had there been no Government Corporation investments.
In 1976, the amount
by which it would have been higher is around 4,000 billion lire.
Clearly, the poorer performance of the production sectors had
heavily limited the level of income to be distributed, and it has also
affected the absolute level of each share.
This effect is confirmed for the manufacturing sector in Table II.
34 and Figure 11.33.
Almost one half of the differential in total labor
income, around 1700-1800 billion lire in 1976, was lost within manufacturing.
This result can now be compared with the effects produced on
2
the cash-flows of firms.
1972.
Their cash-flows are quite steady until mid-
Then a consistent increase is registered during the 1973-74 re-
covery.
But the most relevant increase is produced only in 1976.
The contribution of Government Corporation investments seems to be
positive.
Around 200-300 billion lire per quarter of additional cash
299
flows are reported in the control solution, including Government Corporation investments.
Now, traditional relation between investments and
cash-flows can be discussed.
As is well known, the main theoretical problem is the correct
identification of the phenomenon.
do investments generate cash-flows?
answer.
Do cash-flows push investments, or
Obviously, we cannot give a definite
But a simple comparison of profiles can be considered.
Investment expenditure in Italy was quite low in the early 1970's.
In the same period, the trend of cash-flows was quite steady.
The high
level of Government Corporation investments did not produce a significant difference in cash-flows.
In the first quarter of 1976, while investments were still declining, cash-flows jumped to the peak level of the period and remained
quite high for the whole of 1976.
Investments, on the other hand, showed
an increase only in the second part of 1976.
To arrive at an index of income distribution, we have produced the
ratios between cash-flows and labor-income for manufacturing.
This index
is shown in Table 11.37 under the two solutions considered.
The heavy income redistribution is revealed clearly by this table.
Indeed, the ratio increased by .17 between 1967 and 1969, after which
time the cash-flows present a sharply declining path with respect to the
labor share.
labor income.
At the end of 1975, they are reduced to only 95 percent of
The recovery of 1976 seems, however, to have reversed the
distribution in favor of cash-flows, which moved up to 135 percent of
labor income.
Government Corporation investments seem to have contributed to the
300
formation of cash-flows.
Indeed, much lower ratios would have been
registered if these investments had not been included in the simulation.
301
Table 11.32-
OVIM=Value added in Manufacturingscontrol sol.
MVIM=Value added in Manufacturingsmoving-average sol.
CVIMP=Output/Capital ratio ,manufacturings,control
MVIMP=Output/Capital ratiomanufacturingsmoving-aver.
aL
CUIM
2412.50
2594.2
2480.8C
2F) 28.20
2712.40
2732.70
2767.10
2869.00
2972.00
302.1.'
3 Od . 10
3161.10
24q2.50
3417. 60
3414.70
3419.00
3445.90
3519.60
3'486. 10
3432.60
3471.40
3720.40
3674.50
36 32. 20
3847.20
3641. 0
3921.10
3969. 40
4157.30
4176.00
4 28 8 .7 0
4141.60
4119.60
4173.20
4006.50
3913.40
4029.40
4522.60
44 A5.
80
4563.00
4643.40
1
c.
CVIMP
2522.30
(
6701
6702
6703
6704
6801
6802
6803
6304
6901
6902
6903
6904
7001
7002
7003
7004
7101
7102
7103
7104
7201
7202
7203
7204
7301
7302
7303
7I04
7401
7402
7401
7404
7501
7502
7503
7504.
7601
7602
7603
7604
b
2511.40
260 3.50
2631.40
2668.90
2768.eC
2869 . 40
2923.20
298. C
48. 3
2869.00
3287 . C
3270. 0
326 C.[
3279.40
336.60
329 3. ) 0
3219.80
3248.50
348 f. 00
3434.60
3375.00
3576.00
3 3184. 4 0
.157260
.161226
.163202
.168508
.169835
.171967.
.178182
.184634
.187920
.191974
.. 196727
.186198
.214455
.213615
.211005
.2C8462
.208199
.201053
. 192927
.190607
.19,9556
. .192738
.185831
.192408
.178527
3649 .90
.188384
368 3.109
3852.20
3871.30
3 9R4 .40
9849. 60
.185749
. 189307
.185047
. 184881
.173688
. 169061
.168026
.158871
.153227
.156233
.173078
.170043
.171229
.172477
3829. 20
3894.80
3723.60
360 5. 60
3698.90
4161. 70
4131 .50
4201.10
4278.30
2
5
MVIIP
.150415
.155670
.159297
.167458
.171784
. 176806
.186065
.195924
.203068
.210064
.218797
.209477
.246939
.249535
.249707
.250008
.252125
.245539
.236762
.236244
.251077
.245048
.237616
.249284
.234438
.248212
.243160
.246078
.239279
.238 192
.569167
.215191
.213574
.200105
.190564
.193039
.213996
.209789
.210645
.211609
6
'I
Fig.II.31
Value added in manufacturing
MAXInUM=
0.150415
........................................................
e........
................
e..
6701
6702
6703
.
6802
6003.
6894
.
.
6801
-
.
670
.
69('4
.
700 1
.
6901
6902
7002
7C04
*
IMP
.VIMP
7401
7402
7401
7 404.
7591
7502
.
.
.
.
.
.
.
7391
7302
7123
.
720"4
.
7203
.
72"1
7292
.
71-11.
7104
.
7101
7102.
.
7604
.
.
.
7603
.
7503
7504
7601
7602
S.*a*.....
- X
.
**. ..
**a.
.
.......
eeeee..*SUeeeee~eeeeee..S
..
..
..
..
0.569167
..
..
.
MINIMUM=
303
Table 11.33 - Total Labor Income, current prices
billions of lirtMRETR=moving-average solution
CRETR=control solution
ARETR=anti-cycle solution
YRETR=pro-cycle solution
6701
6702
f73U3
b704
8801
6802
3 359.90
3317.90
34d 1 .90
3469. 70
0
.0
8903
8904
7001
7002
700 3
-
80
'.214.8(1
0
4413.30
0
451/3.90
0
/104
0
7204
/
35s8. D30
-36
38.50
3704.du
30
1.40
3'.38. tO
3449.00
45b4.ii)
3642.40
311ie. 10
374a 3. (1
'9*
1 40
i?'1"!.00
40
40 /5. 0
40d7 . eo
0
1401
844.100
1402
7403
8849.10
0
0
"502
1503
9334.90
9677.oo
10309.5
10104.9
112 /1.3
11i840.0O
7504
7601
7802
0
12279.5
0
126b6.3
7303
*0
13446.1
7604
0
13827.7
'.1.8.0 0
'144.3 JO
*44
.-0 40
0 90
' :>
438*.60
1690 9U
48t1.80
4V64.40
4')'d.00
50Ii
50 36.20
. 80
14 61 b 80
b3.,e 0
b91
91 02.*00
9 /04.90
10 11S.7
11010.0
11 1, 7e 3
121*6
Ie thu0
e
4618.20
49td .50
0 35 *50
1Q
'3 t O
ID U~ 4J. 30o
b449.50U
'it84, 70/
d 14.00
"0 '3.90
6443. 70
4404e'.0
4,1//. 10
48 I 9. 40
.
0
462.40
4810.10
502 . 30
5088.80
5144. 40
34b I 10
ti5810 . 10
5889.170
60 I8.80
6415.90
8933. 10
73j9 1. 6v
1304
7404
3s
3Il4
3434.60
3456.20
ARMIR
32ib.40
iii . eu
3929.5 0
7 102
7301
1302
1303
72UI
J45/.30
4134
1101
1201
7202
1203
.3ied .,I
3441 .90
4551/. 21
433/. /0
j /03.60
4005.10
70 04
1103
JIJ 3.I0
4608. 90
4J,
338'.3.20
jj.0
6901
6402
4211.00
331 U. 0 i
3304' a jv
3e1j.30
3,11.70
3688.90
b803
YRETR
REIR
CRETR
:3'++4.
00
5591.40
19. 10
03 d e
-
/4U
/003. 90
4
U.10
.881 .43
91310eu
910 3.1U
.10220.1
110438.9
I1494*
1211 /. b
Iedu.9
8098.91
b441 .0 0
8991 .9)
l'+9.~e00
812'.10
8653. it
914C*90
91/51.40
1023i.7
I1149-O
12230.1/
1286.2
j4399.
136'+5. 9
14449o6
13b 11 .0
13183.6
144.81.6
14515.2
14d!2.3
e
14843.J
14969.8
3.
'9
Fig.II.32
Total labor income
MINIMUM
0
MA P 14UZ
32859980
.............. e4* see. es
@56555505956
5500.5
esee*eee
0 @5.@.@0@@60050000
5
149b9.5977
sesge sees eeoc.a **9**ge*e
6701
6702
6703
6704
5
0
0
0
6801
0
6802
*
0
.
0
*
6803
h804
6901
6902
694)1
6904
7301
.*
0
-
.
.
.5
.
7001
1002
1003
1004
1101
f102
- 103
710'
1201
1202
1203
7204
7302
7303
7304
1401
0
*-
0
*
7402
7403
1'404
>~
.R
7i I
?RT
7503
104
7601
7602
7603
7604
*
7502
1
.
0*
5
0
0
5
****e
.0......cc......
5*ggg5555060005005000
......
*000006006C555*50*90000005550000005
eeseese*ie
305
Table 11.34 -
Labor Income in Manufacturingsbillions of lire
current prices:
CYLDA=control solution
YYLDA=pro-cycle solution
CYLA
b702
.ICII.
/0
0
.122!.
ICII..'Iu
11213.
10
.
.
6903
1 /1.50
Ii le.-e
I195.10
1C89.3U
iebJebo
1e481.10
J35 .40
1436.b(
14b0.O6
I j I.U0
/0
lilt).
I 309.a 30
1'.41 ( * 00
I3s.jeu
1411.40
U
1 3101
14':94
Ie
44 0,030
1611.1/0
.
S16/0.20
7004
7101.
7102
.
Itiu.eo
1/1.00
1191C.CO
I 1ed 0
lees.G
12.3*0
1309. 'P
1491. IU
141eo.c)
144630
i5'i4.d()
io'e.90
I b') 1 .40
1631 .IJ0
1610 .90
1b9C.*90
1 Wye.80
1 15.410
169eodu
)
1746.4
181 3. 3t,
P3e3.80
",i4 -.,o
1964.40
1*
1
7104
/e .
10
i 14e. eev
1905.60
I V4/.A0 0
.0
J,2
eooetvn
120e
7203
7204
.
1301
.
7302
7303
21J3.30
e U -i-.10
2313.10
e eiI 1.10
3 36 Lot)
.265c'.90
,e 1f.*4)
C
46? /.90
t)44 e 40)
0u
3C39.t It
2e92.
.
3434.
.
/U
. 3660 . 30
7404
4842.60
.
7101
7502
I503
.
.
.
4109.
it
4.400.50
4443.50
7s01
4849.00
4Y92.30
7602
7603
.
525. O
7604
*
5389.00
.
d
C9'it. 0 0
le, -)I. 30
?C9110e0
C98tc. /0
34 03.00)
3 / /t.* O
40 1 .030
31
iSCI .60
3601 .91
4050 *eU
.7
1)
/0
.040 t U
4h.0
104
40t-. 1.40
'.6d1. I U
'.Ji2.
515.
60
446b.d
4WZ5
* 9Ut
511 b.t00
54C4. I/)
e44. 30
,.3 'i t 41)
I6/1.70
ee3.* 10
4664seU
'4
4bd.4t)
.
17.
4bIQ*10
(
.
20 10d
d436.$0
CM
7403
1504
el2i *.3U
LJI.2i
13,3.50
1002
7003
1304
401
7402
-
AYLbA
/0.90
I Ptsc, to
.
7103
11
S1I0t.0
1001
-
I I f1ev~j
11 'o.6t)
iede /.50
b804
.
/.0U
/td.
1)
1251.10
6802
.
11
YY.DA
-
e,703
6704
s301
14YLOA
11
s701
MYLDA-moving-average solution
AYLDA=anti-cycle solution
'54199.U0
0
!)il.b ?
5476.00
5731.9U
5881.00
ea
Fig.11. 33
Labor income in manufacturing
@00.00060
000 0000.0600
.........
MAX IMUMSU ' 881*00000
1170*199'9b
MINIMUM6
0000.000~*e
000066o
......
000 OOoo 06000000000.000000
0***eo
~ooooe
6101
0
0
6101
6704
h601
0
0
0
.68 03
614 04.
0
0
*
0
4
0
0
*
* 690-o
* 7001
700e
*
N
0.
'1~
*
0
1'004
6
.
*
6
.
*
0
*
7301.
*
0
0
6
*
0
0
*
7301
7303
*
6
4
..
*
0
.
0
4
0
?304
*
0
1401
*
0
6
0
*
0
*
0
740e~
7:40 3
7404
7501
7502
0
0
0
0
0
0
CYTJDA
1b01
0
7603
* 7604
0
-
%4~. MYLDA
0
0
000000000
0 ..........
...
00900000
..................
0 006 ..........
...
000.60 0060 ....
0.0....
90000
307
Cash-Flows, Manufacturings,
4
current prices.19O't'.
MCASHF=moving-average sol.
CCASHF=control solution
yCASHF=pro-cycle solution ACASHF=anti-cycle solution
Table 11.35
CCASHF
6703
6104
6A0 1
6802
6803
f804
6902
69)3
b904
7001
7002
7003
.0
.6
.0
0
1460.51
3. 11U
1i'
15d4.30
1541.
154 130
16,9.1 o
163$.9U
11/17 6.50
1 fi e 11
I *0 0
19
19tC- ii)
1dtiCedO
42
/3.t Ii
2134.edt)
7004
7101
7102
7103
72U 1
7202
7203
7204
7301
1302
1303
1304
7401
7402
7403
7404
7501
7502
S
0
os91)
14 lb. 0
1410,40
15
. 11
PbnI .10
16 13.60
Ib3". 31)
19Av-3o
14 Id * JO
146bb4U
1416. /1
141 feob1
14bb a I0
j1t5j .60
2e? 4. 90
25 /.du
Ceb U *710
euv'.-60
ev' 1.-70
1
~t.o
,14 . 31)
I 31.90
1*4
194 (.99U
19 91)-40
106oo0
1I)1 . tJo
I
Ie.
1940
#1TV
*0
co9 ot
e0 31* 1t
eu ii .e o
Co 0'*50
143-.eU
143 1 o U U
lo4 3-01)
I 16v0.',0
194- .60
30
/.
1416*30
I / tv, 1
o
.0
2t)4
22?40.4t)
dIiu.bt)
1 U *u
24
e'.IC.00
dlo* IL
eol.uL
d29. liiu
33.
0
d UV1IO a
e099. *'
e346'00
342.10
0
0
.0
34419 / uL
3 114. oI3
3.i45 ,90
4096.4)
4400.3 o
el /3.30
g
31e9 *t)
ej It)9
i 5.10
9eu
34300.60
.301,11,3.940
41ei.eO
421b-oe
445b.bod
j4 3.60
39 .1.00
'41 11.10
6155.40
6693.00
7 I9.0
56#4
.b1)
IabC.40
'd
,c iii
C (24.u0
C .' 90 e 50
4133.10
0
ed,43.i.01
e4i
2149.1 U
293.*40
30 33.00
7504
7602
7603
7604
4.3
14(.0 00
ACASW
YCASHF
06.--------.-***
2450.eO
7503
7601
tIASHF
..............
..........
t)70 1
blOC
6702
-
.31)
ilbI.
34
3bU e* 10e1
e bJ
oh
3b 12.9 Lb.IU
4co
1 ft
41
31931.91)
J3?V/. /t)
4141j..1
e3l *o40
b4 t ,
b90'.5'1
t3 :#4 '1k4it)0
*
641e.
69a2.
ItU
0
. 1
Op
Fig.II.34
CasE-flows, manufacturing
MAXIMUM*
1435.199915
MINIMUM,
geeeegO 9060 00.0006 0 ~..........
..........
e.g..........
Og egg.. .. g.eeeegOee
774e9.79687
Oe... gOeseegee
eceso.
*
61.01
.6702
6703
6704
610'.
i.
C>
6804
h,403I
fhi()
69i)
~
tiY0j
11) 01
700i
1003
/004
1103
1104
7201
.
1101
C
102
7203
CCSH
1301
.
.
)CAH
.N.
7.303
130'.
.
7 j .3e
1401
g
740e
7403
1404
1
i',oe
*
03
C
looe
0
C
7b04
00
OC~S.
0.
0..
0.g..ee
0.e...~.o
e..0
~g....
0
0eeggg
0660 *0 0 0
309
TABLE 11.36
CYLDA/CKINV
6701
6702
6703
6704
6801
6802
6803
6804
6901
6902
6903
6904
7001
7002
7003
7004
7101
7102
7103
7104
7201
7202
7203
7204
7301
7302
7303
7304
7401
7402
7403
7404
7501
7502
7503
7504
7601
7602
7603
7604
.075
.075
.075
.076
.077
.079
.080
.081
.084
.089
.091
.084
.095
.101
.103
.102
MYLDA/MKIN'V
.073
.073
.073
.076
.078
.081
.084
.086
.091
.098
.101
.095
.109
.121
.126
.126
.103
.105
.128
.103
.101
.130
.130
.137
.105
.108
.109
.113
.116
.127
.132
.135
.146
.148
.154
.157
.165
.170
.174
.181
.185
.189
.197
.200
.131
.143
.147
.154
.162.
.179
.185
.190
.202
.209
.218
.226
.241
.248
.253
.263
.269
.274
.284
.288
CCASHF/CKINV
.0923
.0954
.0946
.0958
.0962
.1031
.1018
.1061
.1091
.1168
.1221
.1171
.1301
.1320
.1318
.1305
.1283
.1292
.1274
.1254
.1380
.1285.
.1269
.1356
.1348
.1409
.1419
.1561
.1525
.1601
.1613
.1681
.1772
.1639
.1652
.1728
.2351
.2333
.2512
.2704
MCASHF/MKINV
.0897
.0929
.0924
.0949
.0960
.1045
.1042
.1102
-1150
.1255
.1330
.1292
.1464
.1518
.1532
.1539
.1518
.1551
.1529
.1519
.1698
.1602
.1588
.1730
.1746
.1845
.1842
.2024
.1964
.2069
.2063
.2141
.2260
.2079
.2068
.2155
-2989
.2978
.3199
-3444
310
TABLE
II
37
CCASHF/CYLDA
6701
6702
6703
6704
6801
6802
6803
6804
6901
6902
6903
6904
7001
7002
7003
7004
7101
7102
7103
7104
7201
7202
7203
7204
7301
7302
7303
7304
7401
7402
7403
7404
7501
7502
7503
7504
7601
7602
7603
7604
1.2217
1.2669
1.2559
1.2587
1.2510
1.3087
1.2711
1.3078
1 .2922
1.3073
1.3434
1.3911
1.3716
1.3089
1.2782
1.2824
1.2423
1.2355
1.2428
1.2364
1.3094
1.1951
1.1630
1.2019
1.1584
1.1054
1.0762
1.1572
1.0626
1 .6818
1.0507
1.0688
1.0708
.9611
.9493
.9547
1.2696
1.2330
1.2762
1.3509
MCASHF/MYLDA
1.2260
1.2626
1.2434
1 .2459
1.2288
1.2856
1.2428
1.2774
1.2600
1.2806
1.3142
1.3617
1.3405
1.2544
1.2175
1.2171
1 .1872
1.1863
1.1804
1.1685
1 .2002
1.1236
1.0835
1.1225
1.0786
1.0325
.9950
1.0678
.9724
.9906
.9455
.9493
.9388
.8390
.8171
.8847
1.1104
1.0864
1.1270
1.1972
311
5.
The Foreign Account Sector
The growth of the Italian economy during the post-war period has
long been export-led.
Indeed, the increasing openness of the economy
gave the industrial system the opportunity to compete in several world
markets, and to gain an increasing share of world trade.
During the
1950's and 1960's, the possibility of importing oil and raw materials at
a relatively low price gave Italy the chance to become one of the world's
major industrial countries.
This positive opportunity, however, turned
sour once oil and raw material prices started to increase at an accelerating rate.
Under this new situation, the BOP deficit became a serious
constraint, and pushed the Italian economy into a position worse than
that of any other European country.
Indeed, inflation~helped along by
rising import prices, was amplified by the widely-based indexation system
which in turn pushed up export prices.
As a consequence, Italian products
lost a relevant share in world markets.
The trade balance deteriorated,
and several lira devaluations followed.
But this process also meant
higher import prices and the circle began again.
As is well known, this
"vicious" circle has dominated the post-oil crisis era in Italy, and is
not yet under control.
Despite these serious difficulties, Italian ex-
ports have grown very consistently over the last decade.
be divided into two parts.
This period can
As shown in Table 11.38 and Figure 11.36,
Italian exports in current liras grew by an average rate of 15 percent
in the first six years, and by an annual rate of over 30 percent in the
last four years.
On the other hand, import flows increased in a similar way from
1967 until 1972.
In the crisis years of 1973-74, they almost doubled and
312
the huge BOP deficit led Italian authorities to tightly control domestic
The 3.7 percent decrease in GNP (in real terms) stopped the
demand.
growth of imports, which declined even at current price values.
The
1976 recovery, however, showed how closely related are imports and growth.
Indeed, they started again to accelerate at a considerable rate.
The impact of Government Corporation investments is shown in Table
11.41, where the additional import/export flows are reported, together
with the multipliers.
These indices are defined for each quarter as the
ratio of import/export flows to Government Corporation investment expenditure.
In Table 11.42, the total effect on the trade balance is con-
sidered.
If Government Corporation investments are excluded from the simulation, export flows increase until 1970 by around 100-150 billion lire
per year.
After that time, the impact of Government Corporation invest-
ments become increasingly positive.
By 1976 export flows increase by
800 billion lire.
However, the additional import flows are always higher than the
exports activated.
Therefore,
the total impact on the trade balance, in current
prices, is proven to have been always negative, with a peak contribution
to the foreign accounts deficit of over 700 billion lire in 1974 and 800
billion in 1976.
The negative performance of the Italian BOP in recent years is
obviously heavily influenced by huge price changes, coming both from
astonishing domestic inflation and severe exchange devaluation.
correct measure of physical flows is therefore needed.
Thus, in
A
313
Table 11.43 and 11.44, we report the values of import/export flows
The impact on export flows (see column 1 or Table 11.45) is
still negative until the third quarter of 1973, but is consistently
more positive after that date.
The differentials on import flows are positive throughout the
period, but these effects are overweighed by higher physical exports.
Therefore, the total impact on the trade balance in real terms
starts to be positive (see column 5 of Table 11.45) from the end of 1973.
The effect of Government Corporation investments of increasing
industrial production capacity seems, therefore, to have contributed in
a considerable measure to the increase in Italian export flows.
314
Table 11.38 - EXPORTS, CUrrent prices,billions lire
MXCSI=moving-average solution
CXCSI=control solution
YXCSI=pro-cycle colution AXCSI=anti-cycle solution
cxcSI
mxCSI
6701
6702
6703
6704
6801
6802
6803
6804
6901
6902
6903
6904
7001
70C2
7003
7004
7101
7102
7103
7104
7201
7202
7203
7204
7301
7302
7303
7304
7401
7402
7403
7404
7501
7502
7503
7504
7601
7602
7603
7604
1878.80
1941.60
1988.40
2026.50
2123.90
2217.80
2335.60
2428.30
2459.30
2573.20
2652.30
2549.70
2886.50
3057.30
3091.00
3232.60
3263.60
3349.60
3445.50
3572..20
3745.30
3834.10
3896.10
4177.40
3453.00
4333.70
4829.70
5117.30
5255.60
6046.60
6922.60
7632.20
7174.50
7138.80
7540.40
7614.40
8103.00
8991.40
10035.8
10857.9
1
1892.00
1965.80
2025.30
2075.60
2169.90
2265.00
2382.80
2475.40
2503.90
2615.90
2692.00
2587.00
2924.70
3078.80
3103.50
3231.40
3247.40
3328.40
3409.10
3522.80
3680.30
3760.00
3815.10
4083.50
3371.3.0
4225.
AXCSI
YXCSI
....................................
00.
47C2.30
5174.90
5108.10
5878.80
6730.20
7423.00.
6993.60
6978.50
7378.50
7468.70
7953.10
8816.20
9812.90
10583.8
2
1892.20
1966.50
2025.60
2075.50
2169.80
2264.40
2332.50
2475.30
2504.60
2618.80
2694.60
2584.70
2923.30
3074.60
3098.90
3229.90
3246.50
3326.20
3406.70
3520.80
3674.90
3756.10
3314.80
4087.10
3364.80
4220.10
4700.20
5177.00
5118.70
5888.20
6735.70
7419.70
7007.30
6996.00
7399.30
7493.30
7960.00
8818.60
9817.20
10599.1
3
0
.
.
1892.90
1967.00
2026.20
2075.30
2170.60
2265.70
2382.00
2475.00
2503.40
2613.40
2690.50
2585.90
2924.90
3081.10
3103.20
3227.50
3241.20
3323. 10
3406.50
3522.00
3683.20
3763.10
3816. 10
4084.20
3370.00
4225.20
4705.00
5170.00
5093.60
5851.10
6705.20
7426.20
7007.70
.7014.80
7422.50
7505.90
7984.20
8837.70
9831.60
10612.2
4
0@
Fig.II.36
MINIMUM=
Exports in current prives.
1878.79980
...................
.....-.....-.
a
......
NAXIMUn
** 4...0
*****
9**
*
6701
10857.8984
6702
v-10 1
6704
680 1
6p802
6803
6804
6 901
690?2
6901
6904
$
.
7001
70') 2
70013
7004
71,11
.
CS
.
7 If) 1
710?
7103
71(114
721
7202
7203
7214
7301
.X~
0
7101
7 10 1
7104
740 1
74') 2
7401
7404
7501
79,02
75,1
7504
760 1
7602
7603
7604
U.)
.............................
-
N
.
...
S.
SS.
.S
ee**.
.
.
.***
.*******.
****
**S06
316
Table 11.39 - Imports, current prices, billions lire
CMCSI=control solution
MMCSImmoving-average solution
YMCSI=pro-cycle solution AMCSI=anti-cycle solution
CMCS[
1MCS1
YNCSI
AIMCSI
1721.40
1720.30
1627.40
1695.40
21404.30
1629.50
1696.80
1828.60
1688.10
1853.40
1911.70
1957.30
2026.00
2151.70
2269.20
2406.0
.
6701
6702
6703
6704
1742.60
1691.01
1721.80
16 30. 90
1796.70
1938.70
1693.30
6801
1810.60
6802
680.3
6804
690 1
6902
6903
1975.80
2031.60
6904
7001
7002
7003
7004
7101
7102
7103
7104
7201
7202
7203
7204
7301
7302
7303
73014
7401
7402
7403
74004
750 1
7%02
7503
7504
7601
7602
7603
7604
2072.20
2141.60
226 7.00
23 8 3.8 0
2512.50
2547.90
1823.30
1687.10
1853.20
1 911.20
1956.30
2026.40
2157.00
2276. 0 C
2433.00
2441.00
2714.10
25().60O
2J88. 30
2768. 80
28 9 1. 30
29F43. 00
3024.50
316 1. 10
3239.80
3140.20
2600.10
2774.00
2890. 10
2988.60
3025.00
3167.00
3250.10
3150. 60
3347.40
3479.90
3721.90
3703.30
4597. 90
4971.10
5383.30
6522.50
6990.40
7392.90
7738.70
7531.40
7633.80
7605.00
7652. 30
7470. 10
9083.80
9531.20
10097. 5
3
2499.90
3103.70
3160.20
3307. 7.0
3394.70
33 0 .A 0
3511.40
3662.30
3917.10
.3098.70
4796.60
5203.8)
564 3. 30
6 44. 30
7331.20
7741.20
8070.30
7846.60
7929.70
7871.2
7923.3)
7791.00
3328.00
3471.30
3717.30
36 P 8.5
4566.10
4951.30
5375.00
6510.30
6959.50
7360.70
7699.60
7417.60
7(16.00
7589.20
7635.70
7439.70
9441.50
9023.10
9900.10
10491.2
1
9474.30
10061.8
2
1828.70
1687.60
1849.50
1909.20
1959. CO
2029.10
2157.40
2280.40
2410.10
2433.50
2589.70
2766. 10
2890.30
2996.80
3C32.20
3166.80
3249.20
3145.10
3321.40
3469.90
3727.50
3699. 10
4567.00
4953.10
5396.80
6559.20
7019. 10
7426.40
7746.40
7530.70
7649.10
7614.00
7662.40
7484.50
9094.90
9547.30
10188.0
4
(
00S
Fig. 11.37
Imports in current prices
6902
.
6701
6702
67n
6704
6811
MAXINUIlm
1627. 39990
.
MTINIMUM=
6903
.
.
.
.
.
6Q04
7001
7002
70-11
'
6803
.
.
.
.
.
.
.
7101.
7102
71)
7104
7201
7202
7203
7201
73)1
73C2.
7301
7-104.
7401
7402
74fl3.
749
.tIi
7501
7 9, 12 .
7503
CMCSI-
7604
-N
.
.
7601
7(102
763
.Wf
.
7504
$
.
MCSI
10491.1992
318
Table 11.40 - Trade-balance, current prices, billions of lire
CBOP-control solution
YBOP=pro-cycle solution
COOP
0 0 0 0
68#14
6901
6902
6903
6904
7001
7002
7003
70 014
7101
7102
7103
7104
7201
7202
7203
7204
7301
7302
7303
7304
7401
740 2
7403
7404
7501
750,1
7503
7504
7601
7602
7603
7604
13b.
200
25 0. 000
20 1. 70 1
87.7999
313.300
24 2. 100
304.000
356. 100
317.700
36.20')
268.500
37.2002
338.600
34 J.2N01
202.701
232.700
159.900
139. 400
137.80 0
17 3.-50 0
436.700
322.700
2133. 800
26 0. 299
-415. 70 0
-462.898
-374. 098
-326.000
.
6701
6702
6 70 1
6704
6801
6802
6803
.
-1588. 70
1'284.6 0
-818.602
-43 8.098
-672.102
-790.902
-336.801
-308.89A
312. 000
-410.098
-
135.699
366.699
1
MBOP=moving-average solution
ABOP=anti-cycle solution
YS0P
"SBOP
-
0
0
0
0
0
.
a
.
.
.
170.200
334.900
327. 000
247.300
482.800
411.800
471. 600
519.100
477.500
453.0
0
416.300
182. 700
491. 700
482. 000
334. 700
350. 10 0
264.400
30 1. 90 0
248 . 0 00
283.C CO
540. 100
432.000
34 3. 300
366. 200
-317.200
-341.098
-249.000
-200.102
-1402.20
-1030.70
-6 31. 500
-275. 40 1
-504.000
-637. 504
-210.703
-167.00C
513. 398
-206 .898
338. 602
522.000
2
0
*
0
AOP
..................................................
170. 800
172.600
337. 000
339.600
329.800
330.8 00
246. 900
246.600
481.700
48 3. ICO
411.000
4 16. 200
470. OCO
473.600
518.000
516.000
478.600
474.300
467. 100
4 56. 0 00
410. 100
425. 400
177.900
175.800
482.300
491.400
474.500
491.400
324.900
337.100
339. 800
337.200
257.9 CO
244.400
30 1. 2CO
290. 9CO
239.700
239.700
270.700
272.800
524. 300
538. 100
418.700
441.700
334.900
346.200
365.200
356.700
-339.500
-329.100
-377.001
-341.8 C
-270. 898
-248.0)98
-206.297
-226.797
-1403.80
-1465.60
-1102.20
- 116 3. 00
-657.199
-721.199
-319.000
-320.199
-524.102
-523.000
-637.797
-634.301
- 205. 703
-191.504
-159.000
-156.500
489. 902
499. 703
-265.199
-257.199
286.000
284.301
501.602
424.199
3
4
-319
Table 11.41
DXCSIoDifferentials on exports between control and
moving average solutions
MUXCSIm export multipliers of G.C.investments
DMCSI=Differentials on imports between control and
moving average solution
R([MCSI- import multioliers of G.C. investments
DXCSI
1 XCS I
LIMCSI
MCSr
6701
67n2
6703
6704
6801
6802
6803
6804
.
.
-13.2092
-24.20rnn
.
-36.0999
.
.
.
-4').1001
-46.0000
-47.2002
-47.2000
-47.1001
-. 8571h5E-01
-. 153164
-. 222289
-. 287135
-. 261364
-. 260775
-. 245833
-. 236684
.
.
20.8000
60.7000
88.4001
110.400
123.500
122.600
120.1400
115.900
.135C65
.384177
.532531
.645615
.701705
.677347
.627083
.582413
-44.6001
-.
227591
111.200
.587755
6902
6903
.
-42.7000
-40.5000
-. 213500
-. 18125U
110.000
107.800
.550000
.487782
6904
.
-37.3000
-.
-38.2002
-21.5000
-12.4998
1.19995
16.2000
21.2001)
36.3999
4 9.4 001
-. 152801
-. 811321E-01
-. 420867E-01
.389595E-02
.504671E-01
.63R'52E-01
.103703
. 131 6%5
69*
7001
7002
7003
70014
7101
7102
7103
71014
.
.
.
.
.
.
158724
103.200
.460(425
114.900
117.300
119.500
118.600
120.700
.459600
.442642
.402357
.385065
.376012
135.700
.404736
146.600
156. 900
.417664
.442619
7201
.
65.0000
.179558
168.400
.465191
7202
7203
72014
73C1
7302
7303
7304
7401
7402
74013
7404
.
.
.
.
.
.
.
.
.
.11)9730
.207692
.2 1718
.2116r8
.
74.0999
81.0000
93 .8987
81.7C02
108.6'19
127.402
142.398
147.500
167.801
192.398
2,18.402
7501
.
1C.898
7502
7503
7504
7601
7602
7603
7604
.
.
.
.
160.301
161.902
145.699
149.902
175.199
222.898
274.102
183.400
191.000
199.800
210.200
230.500
252.500
268.297
334.000
371.703
380.500
370.699
349.000
313.699
288.000
287.598
351.301
418.398
425.801
429.402
3
.494339
.489744
.505823
.54456)
.61962(4
.664474
.691487
.863049
.988572
1.05694
1.07761
1.09062
.995871
.888889
.868875
1.03324
1.28738
1.37800
1.50667
4
.
.
1
.292202
.335269
.367006
.381137
.446279
.5344140
.605821
.565308
.50381)1
.4996q9
.440179
.440689
.539074
.721354
.961760
2
Fig. 11.38
MINI!I=
-1588.69922
MAXIMUM=
Trade balance in current prices
540.099854
.
6702
6703
6704
.
6701
6802
.
6803
.
6801
6903
.
7101
.
--
.
7132
7103
CBOP
.
7001
7002
7001
7114
-
7201
72122
72(3
7204
7301
7514
7601
7602
7603
7604$0
.
.
.
7,303731)4
.7401
7412
7401
7404.7501
7902
.--
~
321
Table II.42-Effects of G.C. Investments on
the Trade Balancecurrent prives
billions of lire
SOPMUN
6701
6702
6703
-8. 391) 9
-34.032
-125.300
- 159.5O0J
))
-169).
6 7014
6,301
6802
.
.
-169.800
6803
.
-167.600
6804
6901
6902
.
.
.
-163.001)
-159.800
-152. 700
6903
.
-148.100
6904
7r, )1
.
-115.9c.
- 153. 100
7002
.
.
.
7102
7103
.
-
7104
7201
7202
.
72n1
724
7301
.
7302
7303
.
.
.
.
.
.
.
750 2
7503
7 04
7601
7602
7603
7604
-428.6
-501.5
-125.098
-111.102
-162.247
_
-40.8
-168.102
- 153. 3913
.
.
-4
-110.0
- 105.901
-125.8'8
-186.500
-2)3.902
.
7404
7501
-438.7
.
7403
-541.3
-109.500
-103. 400
-109.30n
-128.500
-121.801
.
-66.3
1I4.500
-110.200
.
.
.
73014
7401
7402
-669.9
119 .800
-112.000
-117.400
-114.500
700
700'4
7101
-403.7)
-590.3
-126.098
-141.898
-201.398
-243.199
-202.902
-155.301
1
-802.8
Fig.II.39
6903
.
.
.
6901
6902
.
6dm4
MAX1NUM
Effects of government corporation
investments on the trade balance in current
.
6701
6702
6713
6714.
6A11
-243.199219
.
MINMUM=
6q(13
.
.
.
.BOPMON
.
71 81
7102
7103
7104
7201
720'2.
7203
7214
7301
7302
7303
.
7002
7401.
7414.
75027 50 3.
7 Y)4.
7601.
760276037604.
..
.........................
0 a 00 0a 00.......... aa 00.. 0 . ...0 ...0 00 -0 0 0 0 4( a 0 0 00 0 0 a0 w0 0...
-34.000244
rc
323
Table 11.43 - Exports, 1963 prices, billions lire
CXCS63
6701
6702
6703
6704
6801
6802
6803
6804
6901
6902
6903
6904
7001
7002
7003
7004
7101
7102
7103
7104
7201
7202
7203
7204
7301
7302
7303
7304
7401
7402
7403
7404
7501
7502
7503
7504
7601
7602
7603
7604
1839.0
1896.00
1941.00
1980.00
207.00
2174.00
2296. 00
2384.00
2399.00
2481.00
2538.00
2422..00
2714. 00
2826.00
2832.01)
2948.00
2925.00
2960.00
3009. CO
3088.00
3217.00
3251.00
3266.00
3457.00
2778.0"
3339.00
3548.00
3681.00
3302. 10
3448.00
36314.00
3735.00
.3515.00
3525.00
3632.00
3689.00
1750.00
3959.00
4242.00
4466.00
1
MXCS63=moving average solution
AXCS63=anti-cycle solution
PXCS63
1852.00
1922.00
1982.0#)
2037.00
2132.00
2232.00
2355.00
2.4111.00
2452.(0
2532.00
2585.01)
2465.00
2757.00
2851.00
2R40.00
2n31.) 0
2891.00
2Q13.00
2948.00
3016 .00
3120.00
3153.00
3159.0')
3333.00
271 .00
3200.00
3390.00
3509 .00
3138.00
3272.00
3443.00
3533.00
3317.00
3319.00
3413.00
3463.00
3517.00
3708.00
3954.00
4145.00
2
YX"*S63
185 2.100
1122.00
1983.0')
2037.00
2132.00
2232.00
2354.00
244 1. 00
2453.00
2535.00
2587.00
2463.00
2755.00
28'4 7.00
2935.00
2911.00
2889.00
2911.00
2946.00
3014.00
3115.00
3149.00
3151.10
3336.00
2666.00
3106.00
3387.00
35i9.00
3144.0
3277. 00
3445.00
3 53 0. 00
3321.00
3326.00
1422.00
3475.00
352n.00
3704.00
3956.00
4152.00
3
AXCS63
1852.0)
1923.00
1983.00
2M17.')
2133.00
2233.00
2355.00
2441.0
2452.0"
2529.0)
2582.0
2463.0
2756.00
2853.0
2840.00
2929.0")
2884.00
2907.00
2944.0
3014.00
3122.01
31'5. on
3160.00
3333.0)
2670.0
32'0.00
3391.00
3506.00
3129.0)
32'7.00
3429.0)
3511 .0')
3320.0f
3330.00
3425.00
3470.00
3519.00
3700.0
3948.00
4142.00
4
(
CXCS63=control solution
YXCS63=pro-cycle solution
Fig.II.40
MINIMUM=
a*
06.
.
.
.
CO
.
. 9 .... *0040000 00000000 * . 0 0@ 0. UO
*OCaC*CO* 000 a00 0 *000**
COO
NAXIMUM=
4466.00000
*..............*0 00 00
0
..
0
.+
.
6701
6702
6703
6704
6801
6802
6803
6804
6901
6902
6903
6904
7001
7002
7003
7004
7101
7102
7103
7104
7201
7202
7203
7204
7301
7302
7303
7304
7401
74C2
740.1
7404
7501
7502
7503
7504
7601
7602
7603
7604
Exports, 1963 prices..
1839.00000
~
..
.
4
ISN
-Is
325
Table 11.44 - Imports, billions of 1963 lire
CMCS63-control solution
MMCS63-moving-average solution
YMCS63=pro-cycle solution AMCS63=anti-cycle solution
CMCS63
6701
6702
6703
67C 4
6801
6802
6803
6804
6901
69)2
6903
6904
7001
7002
7003
7004
7101
7102
7103
7104
7201
7202
7203
7204
7301
7302
7303
7304
7401
7402
7403
74C4
7501
7502
7503
7504
7601
7602
7603
7604
MrCS63
YMCS63
1657.00
1631.00
1711.00
1817.00
1718.00
1897. CO
1952.00
1980.00
1637.00
1537.00
1626.00
1714.00
1601.00
1779.00
1 q36.00
1637.10
1572.00
1625.00
1714. 00
1602. 00
1779.00
1869.00
204. 00
1931.00
2030.00
2133.00
2222.00
2192.00
2352.00
2486.00
2556.00
2593.00
2581.00
2633.00
2693.00
26 31.00
2767.00
2052.00
3020.0C
2670.00
3251.00
3271.00
3244 .00
3103.00
2969.00
n0
1930.00
2025.00
2127.00
2224.00
2200.00
2355.00
2491.00
2564.00
2598.00
2582.90
2630.00
27 2.00
2133.00
2234. AC
2322.00
2296. CO
2459.00
25941.00
2662.00
2698. 00
2697.00
2755.00
2825.00
2772.00
2920.00
3009.00
3192.00
3034.00
34 15. 00
3437.00
341106.00
3262.00
3127.00
3146.00
3146.00
3041.00
3108.00
3052.00
3023.00
2629.00
2868.00
3016.00
3118.00
1
2992.00
3C02.00
2905.09
2985.00
2940.00
2913.00
2510.00
274.1.00
2886.00
2991.00
2
1837.00
1870.
264
.
00
2775.00
2859.00
3A24.00
2882.10
3274.00
3283.00
3249.00
1109. 00
2982.00
3005. 00
3017.00
2919.10
29n2.00
2947.00
2919.00
2520.00
2760.00
2903.00
3001.00
3
AMCS63
1636.00
1570.00
1624.00
1714.09
1602.00
1776.09
1.35.00
1871.09
1933.03
20 30 .00
2138.00
2227.)00
2193.00
2346.00
2484. 00
2564.00
2605.00
25P7.01
2638.00
2701.00
2635.03
2762.00
2951.00
3028.09
2378.00
3252.00
3272.09
3257.00
3126.00
2994.00
3018.00
3020.00
2918.00
2908.00
2950.00
2923.00
2525.00
2763.00
2908.00
3007.00
4
Fig. I.41
MINIMUM=
7601
7602.
7603.
7604*
.
Imports,
1963 prices
A
.
.
.
.
.
.
=$C
.C6
.
MMCS63
.
6701
6702
6703
6704
6801
6802
6803
6804
6901
6902
6903
6904
7001
7002
7003
7004
7101
7102
71C3
71C4
72C1
7202
7203
7204
7301
7302
7303
7304
7401
74C2
7403
7404
7501
7502
7503
75C4
1537.00000
11AXT"UN
3437.00000
327
Table 11.45
DXCS63=Differentials on exports between control and moving average
solutions, constant prices
NUXCS= Export multipliers of G.C.Investments, constant prices
DMCS63=Differentials on imports between control and moving average
solutions, constant prices
MUMCS- Import multipliers of G.C.Investments, constant prices
BOPREA-Effects of G.C. Investments on the Blanca of Trade, billions
of 1963 lire.
tHumes
BOPREA
DXCS63
HVXCS
DtCS& 3
-
.
.
64'04
3540
1
E9Ud
35903
fV904
.
.
.0)'J0
.
/103
.
.
.
.
1102
fou4l
1301
1403
14U4
.
.
1
14
.
I',04
Plue
.
IbO I
.
.I)Iou
.
0
e103.0U I
e1 3.0)0
de03.00
d 3.000
1h.U0U
lee.00u0
99
/'. 0
.I5
)h!
./
.)e
211.u0
ed.0u0
.9
-0.000o
/
I0d
1.1elJ?/
?
-b'.300
-"<+.0000
--,I 54 .0000
3. 000
k'et
141
-!V
-0
00
1T
.300
1'
.
(f
u
10.0000
j 3'4,'
14
''.00000
:)0%)()000
s.0000
'/.0000
h5e.0
Q 00 0
4 t~3 1
4) to35
.bi
* 4t1'
*
.4eq
Ie
11)5 01
11. 000
11 1. jut)
le /.0 Ut
3
P)00
- d.90000
)Iu
it).
/.:10000
I(
le/ia
.ael
.OL
130.uuio
1 /.00
33
L
/.3
.4
-- 59.0000
110.03)0
/
-/#1.300
IJ4
.34
.
1 i . 3) .
I
e4
4
"'
-11 .00 U
-91.0000
441
1"4 ..000
-
.3,),f//9
.
.4/31 f4
Jo/ +4
-46
1 .4,1 o
11 .1*00
I
ou
I/oe. .000
-134.00
-1-
U34
.4 101
/2,
.oU.U0
L3 )/1'. je
.64
.o34/
*.39434
J t .7
t .1
.
31.000
I/
.L
0
J'
1 t1't
-14.000
1,1.Otu
lb/.J3
1,4.0)0)
1t.. OU
4+ 0. %)t/./
3'
.$
.
.
#1431
.4tn.(
eo.o
I
5Lj
.1914
/4.000
-1 /9.Q0
-143.000
1+ /W.il .O29 1.0
.-
*
.31
.'.I'/sin.00
13. 3j
i
.
el3 W
.
.
~
.~
I'o-+')
u.
110/.iiI0
I Ot . .00
i0-5.0U0
1V),.
)Uu
/3 /l)
.e/'V0J'7
.3103(4
.J
1,34.003
.
.
7603
1604
.1
*.i'-'I154.00
S
I
.tU*j*
.1 44t1
9$.vO0o
101.000
10/.000
1.39.3.00
.
53
i
jt-0j
-. e't fuI R.-0
... o/u36-01
.d
t%#514 I~ IJ
10'.00
i'IMu
.
1.4.000
'004
7401
1
/'.oooo
d/.uif. i0
.
.
loeii
-.
I
0
-1
-1
.*
1,4.00 1
t-
-.
I.oOhOM
.
food
13OO
I)13
1*2r.0(00
o.000
-
3
.- >%3/
0
/')
-.
/.0000
.
U3.000
13.0000
IC'.0(00
-
.ie
i
3110
0).0OU
1) ,. toU
10 4.000
I y /-/
e2ij0
J4.(1)0
.
1102
0 . 0
)
-.cb
0
/t,"
e -32-11 U
f'i04
-4/.1)0
'0i3
11 /.0011
It/ .00 U
1 u .)0i
0 1'4
3
-. I
-d',.30tJ
. -b.0 3000
j5.u0000
/003
.
-
-.
.01130
*0
L1.'IU
.
*3.1
-.
-'4
.
0
-.
-i1.30(30
-43
.
-.
-.
13.000u
-
.
1101
I*
J.
-,.0300 j
-a1i - . 680010
1000
*.
.
-ul
-. i',to
1, ,/ I QV.0
-. e440 46ii
-.
4333
.
.u ik)
-11.1 00o
-:
o '000
b1 03
b /'4
ebO I
61,03
6.0)
-*
'
-13.ouo
.
/
.
'
6 101
" foe
Id'..
.44'/t)
. 40
1
0130
1'6.000(
194.000
Fig. 11.42
Effects of government uorporation *9 TAI1I
prices
Iinvestments on the trade balance, l1~
6 OOO
MIIIM
MINIMIM:
-
00000000000
0400000000
00040a0
000
00000a0aa0
0
I's4efO')OU0
0
fAO
6104
6&
8
03
61-t) 4
*0
6403
110i1
0
1301
71401
.
0303
4
0)
1600
0
0
0
00*
0
0
0
0
0
00
0
9
0
0
0
0
@
*
*
**4*
**
*
.
.
0
0
0
0
329
Table 11.46 - G.C.Investment multipliers
on the Trade Balance:
MUBRE= constant prices
MUBOP= current prices
RUBRE
6701
6702
6703
6704
6801
.
.
MUBOP
.00
-. 214286
-. 759414
-. 759036
-. 935672
-. 99 636
220781
-. 537341
-. 754820
-. 932750
-.
-. 96306P
6802
-.
972 376
-. 9 33122
6803
6804
6901
6q0 2
6903
6904
7001
7002
7003
7004
-.
-.
-.
-.
-.
-.
-.
-.
911458
-.
9.44221
-. 81)097
-. 915306
770000
669693
-. 763500
7101
7102
7103
7104
7201
7202
7203
7204
7301
7302
7303
7304
7401
7402
7403
7404
7501
7502
7503
7504
7601
7602
7603
7604
826531
603511
498113
39i"572
-. 295455
-. 221 184
-. 207831
1737,39
-. 167131
-. 149 171
-. 149248
-. 128205
.962025F- 01
-. 147663
-. 672014IF- 01
.210526E- 01
.2577.32E- 01
. 1291')F- 01
.478723E- 01
.102773
. 168605
.193750
.263492
.3,30247
.350453
.335294
.381538
.511327
.680702
-.
1
W72916
-. 671040
-.
f19149
612400
523774
444444
191169
325545
3448q0
313961
305014
285635
244609
282051
268105
132902
-.
327421
-.
-.
-.
-.
-.
-.
-.
-.
-.
-.
-.
-.
-.
3i 9 204
-. 32144 30
-. 431912
-. 542293
.522504
.471793
.525317
-. 486979
-. 389190
-. 4218696
-. 592348
-. 748305
-. 656642
-. 544915
-.
-
000*0.
2
.I
Fig.II.48
MjNjmUmw
* *
**
~~*****000
.....
**~
..
**e****e*
***e*
*
******
..C.O.. o*
.
.
RATE OF EXCHANGE
*
6901
.
690e
.
6d04
Cos 9
Italian lire for 14U.S.$
.
6d0i
6803
*o~~e...
db1749756
MAXIMUM=
.
.
6103
6704
.
**
6701
6102
-
572.68Y697
.
1004
7101
.
b201
.
7103
7104
.
.
7004
.
7001
.
704
.
1202
7203
7204
-
1301
740e.
7403
.
740-4
.
J04
.
1303
7601
7h0i
C
/604
7602
s
7603.0
7604
a
O
0000000C
be@
C
oose.0
0
N
331
6.
The Government Budget
The recent debate on Italy's economic difficulties has emphasized
the negative contribution of overwhelming Government deficits.
Indeed,
while Government expenditure grew very fast in the last decade, Government revenue lagged behind.
Until 1973 tax collection was very poor and
the total tax-effort was still below 28 percent of GNP.
Only during the
last two years does the fiscal system seem to have performed more efficiently.
Tax collection reached 33-34 percent of Italian GNP.
One of the key points, often underlined, is given by the increas-
ingly negative contribution of the Government sector to savings formation
Indeed, in Italy, private savings have always been produced at a
considerable rate, still above 15-16 percent of GNP.
These savings, how-
ever, have more and more been outweighed by negative Government savings.
This trend has been reinforced by the accentuated cycle that Italy
experienced after the oil crisis.
As can be seen from the tables reported in this section, deficits
and Government savings have deteriorated seriously during the recent period of stagnation.
This deterioration clearly is due to the strong
rigidity of Italian Government expenditure compared with the usual reaction of tax revenue to the level of activity.
Thus, to investigate the effects of Government Corporation investments it is necessary to recall their movements in the simulations we
performed.
They are first considered as a demand push which activate higher
levels of production.
Once they are incorporated, they also give the
opportunity to increase activity if demand conditions permit.
332
The impact is here seen in terms of Government current account
deficits (Table 11.48) and of Government saving (Table 11.49).
In the
first part of the period, from 1967 to 1972, the higher investment demand of Government Corporation has contributed to sustain higher production.
Therefore, without this contribution, the Government would have
collected fewer taxes, and would have run a higher deficit, both in
current account and in total.
After 1973, however, Government Corporations made a much weaker
contribution to investment demand, and the effects of previous investments on production capacity were obviously constrained by weak aggregate
demand in both domestic and foreign markets.
Therefore, the impact of Government Corporation investments on
Government deficits is positive but quite small during the last three
years.
This outcome is, however, far too limited to evaluate the full
effect of Government Corporation on Italian Government deficits.
Indeed, Government Corporations ran into heavy losses in recent years, and
the Government has always been requested to finance them.
This effect, which could be a relevant one, is not related to
Government Corporation investment expenditure in itself, but to the
management of their plants once they are put into production.
As we have seen before, Government Corporation investments seem to
have adversely affected the output/capital ratio,
Unfortunately, it is not possible at this stage to focus on this
impact in an analytic way.
333
-
Table 11.47 - BAlance on Government Current Accounts,
billions of lire
MTIBAL=moving-average solution
CTIBAL=control solution
ATIBAL=anti-cycle solution
YTIBAL=pro-cycle solution
ATIBAL
HTI BAL
.*o 0016
II
F
S0
-43.5000
I I..D'0
033.1 -Be.5000
100100
41 * 4000
i /9IF00
0
91.
A6704
(3U1
6802
6(s m 3
-61
.
-it4. Tot
-
- kb- t00
?I
-I
-291.)U
- 135. bU 0
-2.6000.
-et 3-i 300-1.
** -I0l01
-33J.2e0U
-403.-.00
-1
61404
6901
/9.,50U
6902
6904
7001
7002
*
1004*
7101
a
7102
7103
-
7201
7202
7203
-L/. /00
-0.6000
. /01OUo
-_e4 9eJOU
-13.'00
*
-
-
-490.L9U
.
.
7303
7304
*
740 1
*
.
-3!).03U
.
-244
.
.
IS04
.
t601
1602
.0
7603
7604
0
311
-(61.200
-PA .. 0
-UII1
t I * 300
0
-10A. 0t)
I
.1()U
-4'3e
-303*it
-42'.0t * Ot
-4 (4..Ut
-9Q9 * d* U
f, -.44)U
- 140* IOU
-1 63.100
-
-1(09 * 0
* 300
-11" .-
-4 It 0.
0*90
-22
~.30
CC
-11900
-14414.9
*20
e10.'.
-let /. J0
-1
-121.3
-938*200
-1.'.(*00
66S*1 -1r3'." .0o - OVA
-e
-903.*100
-631.000
-979,*300
-1524..0
0
-2429.90 1
-226a2.46
A
-46311
-153I . 0)
-432.600
-ebl'80
.160
-916.100
-t6.20
-1809.201 -109.
10
-j94'1 2
bO
J40bu0
-1 j",9.60
-A
-11,.1900
-491 .4010
I -1e4'.10 -3419.0
-110.t
.
7tb1
*
00
-4%
/ * 690
-902.*.soo
-b49.0 U
.
/100
-* du 1.
-. 30 1/*! U
)()
-
04 0 0
-91.
-614.dou
-1 I-3u
-1d./u
-431. /U
- I)29.YJ0
-/:3.
"*90OU
1 a U) U
-. 3')
-49. UUU
-.
362.1
-'.00.00 0
-3,1.000
76.00
-171*U0V
-,iO' 0
-).J0U
301
.900
-4 /1).VO
300
-8540-"90
.
1302
7N02
7503
.o3
-0
/99 w0
1204
"1402
7403
1404
-312 . 107
-4 33. 100
-31
.
-3e.00U
14d
-s'-UU0
-'.4n.
-1 ,*300
3t1-. 100
-21 * ~t
'.* euuo
-3.40000
-j
-d2.ei
-33$.6i
-390. 0O
-3. -0000
-40
-Y)9.300
7003
114
-ad.U00
-___4
-&:5-1000
-JI .4000
-'9.1000
.
3-24.10)
I 13.000
7 3.40U
-63.4000
4.1. e UUt0
-ede. (uu
- lb.200o
13'.i0U
-
,
6903
I
-3.91H)00
/0100
-3000
.5
*
6701
6702
b703
(
C T1 DA.L
Cri
S.....
-1
L9.t,0U
-2433. 1
-eel.*- I
-2091.*
-A "3e.60
-2413.90
-2241.9)
-F
e"
Fig.II.44
Government deficit, current account
-2b3i2.19980
MINIMUM=
-
..........
4..............@O.
OSSO- *OSO**O#O@6SOe
e
*g****
**********
179*499985
*
*
6101
MAXIMUM
.0
6102.
.
6103
6704
6801
6802
.
*
.
.
6402
6'I0J
6904.
.
0
*
6804
6901
1003
ru
7004
0
0
*
1001
.
.
-..
.
0
*
1101
7102
0
*
0
7100
*
-0
*
71?014
7201
*MTIBAL
7204.
7301
.
7302
7303
.
CTIBAL
.
-
04
7601
7403
1-4021404
. 0
---
.
.
.
..
LA*
335
Table 11.48 - Government Balancebillions of lire
MBG-moving-average solution
ABG=anti-cycle solution
CBGwcontrol solution
YBG-pro-cycle solution
*P*6**.*0O*
0000....06*066.............
-4
b702
6704
6801
b'302
6803
0 U
- 34 4-.M
-348. 100
-'.51. 00
-b14.2 U
-446.300
- 183.500
-405. 00
-553 *2 CO
-10. - 00
-55./eIOU
-/fod.*000
-*3
6901
-1,1.*100
6902
-74.*eUUU
-1111.50
-ke'6i.30
/)
-149*,.00
- C 2
I I?., 30
*4(
000
- e49.*40U
00
-. 9 2.
**111.400
-10,).Z 30
1101
7101
-8710.400
-456. 100
-9vL-.00
7103
7104
-1430.10
7idoI
-181 I.3o
720 3
'1203
7204
1301
'1302
7303
1304
1401
-d,3. 100
-1583.00
402
-194.dO
1403
1404
-1306.80
-1556. 70
-1449.80
-16119.*41)
-141
90
-34f* 50
-1 66.
-4891e2.O
-1905
* L3
-3d236.O0
-4916.40
-411e. 6V
-1 "',c
-
7003
6
-963.6)0
-d 1
-2
1503
0
-10 9.50
*-19db.0
-993.*
$30
14 10. (10
-3559.50
-4110.50
0
-3750.30
0U
-14 i. 0
-iL bU.10
-
-549.90) L
_1011 *V
o
-11 .0
-10 /d.e5
-1 9e'*00
-9111.000
-19 1.90
-13'1 .10
d
-11 .3.
bl.9
10t4
--66.500
34( 1 0
C-1641.10
IMI.30
-36 '29.*411
-5069.60
7504
1601
7602
7603
7604
.3
*50
9-13 0Pi
-1014.40
-t$34 * d 0
-6b I.* Q
-1e36S*
-$40j. 4-iU
- I 1 .300
-ie.bii *410
-1009.00
-h19.eOO
100 a 4
-e36.
0 r.e
-51 -000
-15
-1345.00
-dedb. 10
-'.01.000
-3t2. 0 J
-1/Qed00
-5'43.
-ib !D 00
d UO
-abb.6oo
-VJI .400
-941.
-'4t2.
900)
-1514 e'3()
-1014.00
-19e0.d4
-99b.e0o
-1 103.d
-14'+* 40
-ebde. 41)
11.00
-?e 14*ja
)
1004
-341.4vi)
*
)
-161
-40e100
*-664.000
1bO. IOU
- '1* 1
- -e 1.3Li
-1 ~ '.1j
-590.400
0
f00
-540. bOO
-ib,*000
-151 .sOO
-113.
-. 34.
-541*0O
-do3tI0
I
6804
6903
6904'
7001
-e99.eOu
-e9ti. /OU
1.00
-305.0 oo
*
67O1
ABG
Yao
4BG
COG
-
409 1 *90
*90
I3
*60
-165 1.50
-410.i0
-192 few)
J 40
-3641.90
-5091 .10
-3594 * 30
-41V4*90
-3/64.eti
CJb42
-3o 19.60
-50
-4113*60
-4154.bl)
-34.
. 10
-4119*dU
'4
Fig.II.45
Government deficit, total
MINIMUM=.
-5091009?bb
MAXIMUM=:
1001.87964
h102
6703.
6104.
6801*
aQ
0
b904.
1001
10(134
1101
0
1203
1.104.11B
'1401
*0
74.03
7404*0
I ti
*il
7503*
7504*0
7e,1
l60e
~IS
*(
7601
160'.4
U-)
0 00
ga
0 q 0 0 0 000
ON
00
00a0
0 00
00 0
0
a *...a00
0
0.0
00 0 0
00
0
0
a00
0 00
00a0
a0
000 00 0 0060 00
00
0 00
337
Table 11.49
Government Savings, billions of lire
-
MSG=moving-average solution
ASG=anti-cycle solution
CSGwcontrol solution
YSGpro-cycle solution
ASO
YS
MSG
.s
lei iiijtU
67101
t)702
*
(3703
*
6704
*
-1,4e40L0
-264J.vuiu
6801
00%)U
*3802
.
(5d03.
-P1:eeu
-ge~e~O
b?414
*
7001*
7002
*
71003
*
.1004
7101
*
7 10U2
*
720?
*
1204
*
7301
-9,
*
iJJU
~
::*'I
3&c.f.k)-
-1
L1
73u2
7 3U3
*
-9,13.9(00
7402
*
-1-33
7403
*
7404
a
10U
-P)4
-1)9 4 0O
7IO I*
N0
7b03
71->04
a
*
1hlt0
1b02
-21)19.d 0 tit,
-70O.iiuu
-1504.30
I biT6 9 e
-3 343 e IU
*
7603
*
7604
*
-4ohs IUUeb'3
1
-'.00.eUI
li u
1104
-etfoe00
I~ -10f.U
-P10 0)
-
1 ,+,-*
0-
P14e0O00
-114*'.+00
-db.0000)
-414.iU0
196.'1Ij0
-e!34 90 0
j *3u
-I
-. Dt4 adO
-t)9 0j U
-4 * 40U
1.~
1i0
-Det
-ell.10
1Ot4
-t)UPiIM10480
-:DU 1 t0o0
-431.*)00
-4.-of) 0-'.19.300
-J4 1.4 iLU
te.u-0i1U-,7oJj-UiO
euo.30
UU0U
U
0 .40
- c * ) i0 'j0-e40).ciLJO
-1603':)0U
-11 i'..)00
13 -". -1i Ui
- b 13* h ) U0
-'3Lj e4 0U
-. 3t.)i. Ot)0
-'4-0e10)0
-bb. 30O0
00
-4.3
-l I a.'0 0U
02U
b904
-cii. f000
IL)(* (U
814,90ou(
-114*b00
-348obOI)d*tj
-b3..AUOJ
iI)I .bOo
c~b 0 )0
-11'-)0 (0 0
-3'.90edu
l
id 0 fM.JU
Id~U
19~0.0bu0
143.e9i0U
-tPU90bVU
-1
.e40
41
10)
)-)0
+ -'411 eeU
-!3,. 1 * f .00
-111~i
- Pj-..4UU-12400
144?-*OU
-6/10,40U
(10t.3
-J14 0.100
0
-(i?10
(I
-(/l?.e0U
- I 1e t. b)
- 3L .00
- 33b I. IU
1-.3,-40 U
-Ib0.cluu
-1 II.UOu
-tobo0 JU0
-3blee00
af
~
-eft.ugl (0
-IJ1J.O0)
i-,,3.90U
1461a e e)
-ibebO
-1914*IU14~ic.L
d3~.t Ui~ii
-164'e.30
-213b.bo
161e.30
I
-e Ib'". go
I bleb. e0
2
-1,'+.0u
-e13,jebo
-1bueetw
.34
-1440.JU
-bI
1 * giuo
-10o.t
-b09
-21190bu
-181*du
-8t-e1l0 41)(
Fig.II46
Government savings
MINIMUM=
MAX
7 .0998
lMlJi
lb3o899902
.
h/00
6702
-336
.
7004
710
.
7103
.
.
6103
1304a
.,
.
.
e0'.
101
.
7201
b03
7I0t
70-4
7~i
,J7
b
101
11104
71603
..
.
.
..
.- - - - - - - -
-*
'
'**
*0
0
339
PART ONE
NOTES TO CHAPTER 1
This assumption is purely arbitrary.
In the case in which k <k
c I'
,
1.
simulations similar to the one we will present can be performed.
Clearly, some different results in the policy decisions may be obtained.
Thus, condition
3qI/9k <0
follows.
See Foley-Sidrausky,
Chapter II, Page 18.
2.
The IRI and ENI corporations represent one of the first attempts
toward competitive government management.
The U.K. and France now
seem to be following such a behavioral line.
3.
This hypothesis can be proven to be incorrect if a higher government wealth gives rise to higher flows of social services (pension
schemes, public health programs, etc.) making people "optimistic"
about future conditions and increasing their structural propensity
to consume.
4.
Indeed, in (1.24) we could have 7T < 0.
were to be negative, i.e.
d <
Then, if
the income effect
m
rg , and greater than the wealth
effect, then we would have a downward-sloping dd schedule.
This
would lead to an upward-sloping CC clearing relation.
5.
The experiment performed here is similar to the previous point (3.1)
Assets market conditions are also considered.
6.
For the sake of simplicity, we consider ff k
7.
As already given in (1.21).
=
0.
It will hold as long as the wealth
effect on private demand for physical assets in small with respect
340
to the increase in the share of government capital.
341
GLOSSARY OF SYMBOLS
List of symbols:
a
=
total wealth
a
=
private wealth
b
=
bonds
C
=
consumption goods
d
=
per capita government deficit
e
=
per capita government expenditure
G
=
government debt
g
=
(G/N) = per capita government debt
h
=
government propensity to save
I
=
investments goods
=
(K IN )
c c
=
(K IN ) = capital intensity of the investment goods sector
k
=
T
(K IN)
K
=
input of capital in consumption goods production
K,
=
input of capital in investment goods' production
=
stock of capital
K
=
government capital stock
G
k
=
G
(K /N)
K
=
private capital stock
k
=
(K/N) = private capital intensity
m
=
money
N
=
input of labor in consumption goods' production
k
c
k
T
T
K
=
=
capital intensity of the consumption goods sector
capital intensity of the economy
= intensity of government capital
342
i
=
interest on government bonds
N
=
input on labor in investment goods' production
N
=
labor force = population
n
=
rate of growth of population
p
=
consumption goods' price
price of capital
pk=
p
=
price of money
q
=
gross national product = qc +I
q
=
production of investment goods
qC
=
production of consumption goods
r
=
rental price of capital
w
=
wage rate
x
=
(g/m) = debt/money ratio
z
=
net government transfer
y
=
gpM = per capita government debt
7
=
expected rate of deflation
7T
=
expectate of rate of change in the price of capital
0
=
g/g
m
k
Stars are for "exogenously given levels of variables"
Dots are for time derivatives.
343
NOTES TO CHAPTER II
1.
In this case, we should notice that we move out of condition 11.12.
indeed we have:
he <
pkqI(kT
k)
and a smaller rate of increase in per capita government capital will
.
result after such increase
2.
This result can be made clear by considering that new government investments need to be financed by money or bonds, and hence,
the return on
alternative asset (r/pk) must decrease.
3.
The horizontal section of
CC
is derived from the conditions of
the production possibilities frontier.
For any Pk <k
, no effect
can be derived from consumption goods production. Hence, only one
firm
4.
d
can clear the market.
Higher government capital can also lead to lower private propensity
to consume.
As shown in footnote 3, the result reached here will be
completely reversed.
344
NOTES TO CHAPTER III
1.
See:
Trade Tariffs and Growth, Cambridge, MA:
Bhagwati, J.,
MIT Press, 1969.
Dornbusch, R., "Notes on Growth and the Balance of Payments," Canadian
Journal of Economics, August 1971a.
"Money, Devaluation and Nontraded Goods," American Economic
,
Review, December 1973.
,
"A Portfolio Model of the Open Economy," Journal of Monetary
Economics, 1, 1975.
,
"Currency Depreciation, Hoarding and Relative Prices," Journal
of Political Economy, July/August, 1973, 81, pp. 893-915.
Fischer,
S., and J. A. Frenkel, "Investment, the Two-Sector Model and
Trade in Debt and Capital Goods," Journal of International Economics,
2, August 1972, pp. 211-233.
, and
_
, "Economic Growth and Stages of the Balance of
Payments: A Theoretical Model," Report No. 7129,
Center for
Mathematical Studies in Business and Economics, University of
Chicago.
Friedman, M., The Optimum Quantity of Money, Aldine, Chicago, IL, 1969.
Federal Reserve Bank of Boston, Conference Series No. 12, International
Aspects of Stabilization Policies
Foley, D. K. and M. Sidranski,
Monetary and Fiscal Policy in a Growing
Economy, MacMillan, London, 1971.
345
Frenkel, J. A., "A Theory of Money, Trade and the Balance of Payments in
a Model of Accumulation," Journal of International Economics, 1,
May 1971, pp. 159-187.
, and S. Fischer, "International Capital Movements Along Balanced
Growth Paths: Comments and Extensions," Economic Record, 48, June
1972,
pp. 266-271.
Hahn, F., "The Balance of Payments in a Monetary Economy," Review of
Economic Studies, 26, February 1959, pp. 110-125.
Hamada, K., "Economic Growth and Long-Term International Capital Movements
Yale Economic Essays, 6, Spring 1966, pp. 49-96.
Johnson, H.G., "The Monetary Approach to Balance of Payments Theory,"
Journal of Financial and Quantative Analysis, March 1972.
, "Trade and Growth: A Geometrical Exposition," Journal of
International Economics, 1, pp. 83-101.
Jones, R. W., "Monetary and Fiscal Policy for an Economy with Fixed
Exchange Rates," Journal of Political Economy, July/August 1968.
Kindleberger,
Charles, P., International Economics,
4th ed., Irwin, Homewood,
IL, 1968.
Meltzer, L., "The Process of International Adjustment Under Conditions of
Full Employment: A Keynesian View," in H. Johnson and R. Caves,
Readings in International Economics,
Irwin, Homewood,
eds.,
IL, 1968.
Mundell, R.A., International Economics, Macmillan, New York, 1968.
, Monetary Theory, Pacific Palisades, 1971.
Negishi, T., General Equilibrium Theory and International Trade, Amsterdam,
1972.
346
Oniki, H. and H. Uzawa, "Patterns of Trade and Investment in a Dynamic
Model of International Trade," Review of Economic Studies, XXXII,
1, 89, pp. 15-38.
Uzawa, H., "On a Two-Sector Model of Economic Growth II," Review of
Economic Studies, 30, June 1963, pp. 105-118.
,. "On a Neo-Classical Model of Economic Growth," Economics Studies
Quarterly, September 1966, pp. 1-14.
2.
See Foley-Sidranski, Chapter 16.
3.
See Foley-Sidranski, Chapter 16.
4.
At least they enter the government budget through the grants they receive
from the government itself.
5.
A small
difference needs, however, to be pointed out.
In the
closed economy case we considered government demand for investment goods
be always satisfied
in the market.
-In
to
the open economy we may still
want the government to express a given demand for investment which is always
satisfied in the world market.
to the previous one.
And this case can be dealt with similarly
However, we may also have the government goal
given in terms of the "share" of domestic capital to be pursued.
6.
This has already been showed in Foley-Sidranski,
7.
See S. Fischer-J.A. Frenkel, "Investme-t ,
in Debt and Capital Goods," J of I.E.,
Chapter 16.
the Two Sector Model and Trade
No. 3, 1972,
pp. 212-213.
8.
See Foley-Sidranski, pp. 279-281.
9.
They may obviously differ for private and government propensity.
For the
347
sake of simplicity, we assume them
10.
to be equal.
This result is very similar to the one about high interest policy found
by T.D. Willet-F. Forte, "Interest Rate Policy and External Balance,"
Quarterly Journal of Economics, Vol. 83, 1969.
348
NOTES TO CHAPTER IV
1.
See:
Arrow, K. J., "Discounting and Public Investment Criteria," in Water
Research, ed. A. V. Kneese and S. C. Smith, pp. 13-32.
Baltimore,
The Johns Hopkins Press for Resources for the Future, 1966.
, "Optimal Capital Policy with Irreversible Investment," in
Value, Capital and Growth, ed. J. N. Wolfe, pp. 1-20.
Edinburgh:
Edinburgh University Press, 1968.
and Kurz, M., "Optimal Public Investment Policy and Controllability
with Fixed Private Savings Ration," Journal of Economic Theory,
1,
1969, pp. 141-177, 1969.
and
_
,
Public Investment,
The Rate of Return and Optimal
Fiscal Policy, Johns Hopkins Press, 1972.
Debreu, G, Theory of Value, New York: Wiley and Sons, 1959.
Eckstein, 0., "Investment Criteria for Economic Development and the
Theory of Intertemporal Welfare Economics," Quarterly Journal
of Economics 71, 1957, pp. 56-85.
,
Water Resource Development, Cambridge, MA: Harvard University
Press, 1958.
Gale, D.,
"Optimal Development in a Multi-Sector Economy," Review of
Economic Studies, 34, 1967, pp. 1-18.
Hahn, F. H. and R.C.O. Mathews,
"The Theory of Economic Growth: A Survey,"
Economic Journal, 74, 1964, pp. 779-902.
Koopmans, T.C.,
"On
the Concept of Optimal Economic Growth," in Study
Week on The Econometric Approach to Development Planning, Amsterdam:
North-Holland, 1965, pp. 225-287.
349
Kurz, M., "Optimal Economic Growth and Wealth Effects," International
Economic Review, 9, 1968a, pp. 348-357.
Marglin,
S. A.,
Approaches
to Dynamic Investment Planning, Amsterdam,
North-Holland, 1963a.
,
"The Social Rate of Discount and the Optimal Rate of Investment,"
Quarterly Journal of Economics, 77, 1963b, pp. 95-111.
, "The Opportunity Costs of Public Investment," Quarterly Journal
of Economics, 77, 1963c. pp. 275-289.
Meade, J. E., Trade and Welfare: The Theory of International Economic
Policy, London, New York and Toronto: Oxford University Press, 1955.
Phelps,
E. S.,
"The Golden Rule of Accumulation: A Fable for Growthmen,"
American Economic Review, 51, 1961, pp. 638-643.
Pigou, A. C., The Economics of Welfare, 4th. ed., London, Macmillan, 1952.
Ramsey, F. P., "A Mathematical Theory of Saving," Economic Journal,
38,
1928, pp. 543-559.
Samuelson, P. A., The Foundations of Economic Analysis, Cambridge, MA:
Harvard University Press, 1947.
Solow,
R. M., "A Contribution to the Theory of Economic Growth,"
Quarterly Journal of Economics, 70, 1956, pp. 65-94.
, Capital Theory and the Rate of Return, Amsterdam: North-Holland,
1963.
Swan, T., "Growth Models: Of Golden Ages and Production Functions," in
Economic Development with Special Reference to East Asia, ed. K. Berrill,
London and New York: Macmillan and St. Martin's Press, 1964.
Tullock, G.,
ment:
"The Social Rate of Discount and the Optimal Rate of Invest-
Comment," Quarterly Journal of Economics,
78, 1964, pp.
331-336.
350
2.
Public and private consumption are here considered as perfect substitutes.
3.
See Arrow-Kurz, op. cit.
4.
The inclusion of
important
government propensity to invest may be very
if monetary policy is ruled out.
done by Arrow and Kurz (pp. 128-131), with-a
For instance, in the work
one good production
technology with government using only an income tax, it is proven that
9 first best solution is not met since their condition (8) is fulfilled
only by chance.
If we intrcduce government propensity to save, then
their variable "s" becomes the level of the "total" propensity to save,
which now
depends
both on private and public propensities.
Hence,
the correct value of s can be managed by the government and a first best
solution becomes possible.
In our analysis, we would find that:
k + g = s[q + dpw
-
e]
or that the private propensity to save must be equalized according to the
following condition:
qipk - (he/p) nk + d - ng
qc + qpk + dp
- e
so that by managing d and h, it can always be fulfilled.
5.
See F. Modigliani,
"International Capital Movements,
Monetary and Fiscal Policy," in Bagwhati,
ed., Development and Planning
MIT Press, Cambridge, MA, 1973.
6.
Fixed Parities and
See S. Fischer-J.A. Frenkel, op. cit., p. 218.
351
NOTES TO APPENDIX OF CHAPTER IV
1.
See:
Dorfman, Samuelson, Solow, Linear Programming and Economic Analysis;
Debreu, Theofy of Value
2.
See:
G. Palmerio, L'Impresa. Pubblica, F. Angeli, Milano, 1974.
3.
The experience of the Italian economy, although remarkable, can indeed
be considered a very peculiar one.
conditions of the recent growth of
historical
vention
and
tradition (or accident )
in
It is not only due to the particular
this
of
economy,
heavy
but
also
government
the competitive system.
to
a
interThe I.R.I.
AGIP were indeed founded long before the second World War, even
though their main growth started only in the fifties.
4.
Historical experience shows how decisions such as providing better
female worker protectio.n or generally healthier working conditions,
or supplying better wage schedules,
taken first by government corporations,
will sooner or later have to be borne by private corporations as well.
5.
The case of the Italian economy is here very appropriate.
Indeed,
government corporation investment programs may compete with wage subsidy
programs like the "Cassa Integrazione" when receiving government financial
support.
352
NOTES TO CHAPTER V
1.
See:
M.S. Feldstein,
"Financing in the Evaluation of Public Expenditure,"
in W. Smith, Essays in Public Finance and Stabilization Policy, 1974.
2.
See:
Arrow, K. J., "Discounting and Public Investment Criteria," in Water
Research,
ed., Kneese and Smith, Baltimore, Johns Hopkins University
Press, 1966.
Baumol, W. J., "On the Social Rate of Discount," American Economic Review,
58, September 1968, pp. 788-802.
, "On
the Discount Rate for Public Projects," in The Analysis and
Evaluation of Public Expenditures.
The PPB System, ed. Joint Economic
Committee, Vol. 1, Washington, Government Printing Office, 1969,
pp. 489-504.
Diamond, P., "The Opportunity Cost of Public Investment: Comment,"
Quarterly
Journal of Economics, 82, November 1968, pp. 682-688.
,, and J. Mirrlees,
"Optimal Taxation and Public Production,
II,"
American Economic Review, 61, June 1971, pp. 261-268.
Eckstein,
Otto, "Investment Criteria for Economic Development and the
Theory of Intertemporal Welfare Economics," Quarterly Journal of
Economics, 71, February 1957, pp. 56-85.
Eckstein,
Otto,
"A Survey of the Theory of Public Expenditure Criteria,"
in Public Finances: Needs, Sources and Utilization, ed. James
M
Buchanan, Princeton University Press, 1961.
Feldstein, M.S.,
"The Social Time Preference Discount Rate in Cost Benefit
Analysis," Economic Journal, 74, June 1964, pp.
360-379.
353
,
"Choice of Technique in the Public Sector: A Simplification,"
Economic Journal,
,
20, December 1970, pp.
985-990.
"Cost Benefit Analysis in Developing Countries: The Evaluation
of Projects Financed by AID and External Loans," in Public Finance
Planning and Economic Development: Essays in Honour of Ursula Hicks,
ed. W. David. London, Macmillan, 1973.
Harberger, A.,
"The Social Opportunity Cost of Capital: A New Approach,"
Paper presented at the Annual Meeting of the Water Resources Research
Committee, December 1968.
Hirschleifer, J. et. al., Water Supply: Economics, Technology and Politics
Chicago: University of Chicago Press, 1960.
Joint Economic Committee, U.S.
Congress, Economic Analysis of Public Invest-
ment Decisions: Interest Rate Policy and Discounting Analysis, Washington:
Government Printing Office, 1968.
Marglin, S. A.,
"The Social Rate of Discount and the Optimal Rate of Invest-
ment," Quarterly Journal of Economics,
Marglin,
S. A.,
77, February 1963,
pp. 95-111.
"The Opportunity Costs of Public Investment," Quarterly
Journal of Economics, 77, May 1963, pp. 274-289.
Sandmo, A. and J.H. Dreze, "Discount Rates for Public Investment Criteria
in Closed and Open Economies, Economica, November 1971.
Bradford, D. F., "Constraints in Government Investment Opportunities, and
the Choice of Discount Rates," American Economic Review,
3.
Note that they do not necessarily have to
used to cover interest payments.
be
December 1975.
equal to the share B
1r
and B
s2
354
PART TWO
Notes to Chapter I
1.
The major econometric models of the Italian economy are:
- Banca d'Italia, Modello Econometrica MlBI, Rome 1969-70
- Universita di Ancona, AA.VV. Il Modellaccio, F. Angeli, Milan,
1976
- Paol Sylos Labini, "Prezzi, distribuzione e investimenti in
Italia," Monete e Credito, 1967
- Universita di Bologna, AA.VV., Il modello econometrico dell'
Universita di Bologna, Il Mulino, Bologna, 1976
and by P. Bosi and F. Cavazzuti, Glistrumenti fiscali nell'
economia italiana, Il Mulino, Bologna, 1974
2.
S.E.C. is the new integrated system of national accounts introduced
in Europe in 1974.
Bologna, 1977.
See V. Siesto, Contcbilitd Nazionale, Il Mulino,
355
NOTES TO CHAPTER II
1.
The three different hypotheses we made to obtain quarterly data for
gover-ment corporation investment are given by a moving-average profile,
a pro -cycle
case and an anti-cycle case.
In the first hypothesis we have divided the annual data by four
and then a moving average of these data was computed.
Further, the pro-
portions obtained for the four quarterly data of each year were applied
to the historical summed data in order to obtain a quarterly series homogeneous with actual annual data.
In the second case the historical proportions of each quarter over
the annual levels of total Italian investments were applied to
data for government corporation investments.
the profile of actual data.
This quarterly series follows
Therefore we called it the pro-cycle hypothesis.
In the third case, we considered that government corporations investments were performed in each quarter according to an anti-cycle target,
i.e. in the quarters where historical data reached their peak level we considered government corporation investments to reach their minimum and
vice versa.
2.
Unfortunately data on profits are very poor and unreliable in Italy.
Therefore the model always refers to cash-flows as the sum of profits plus
depreciation and it has to bear the effects that during fast growing phases
are connected with higher levels of depreciation.