The Ratio of Uncertainty
FINANCE |

The Ratio of Uncertainty

ONLY A RAPID REDUCTION IN THE RATIO OF PUBLIC DEBT TO GDP CAN PROMOTE INNOVATION AND THE CREATION OF WEATH, ACCORDING TO FINDINGS IN A PAPER BY MARIANO MASSIMILIANO CROCE

There are two sides of the public debate on austerity after the 2008 crisis. One argues that pro-growth fiscal interventions should be adopted at the expense of the debt-to-output ratio reduction. The second one highlights the importance of debt stabilization, as established by the European Stability and Growth Pact. The debate does not take into account the long-term prospects of the economy, says Mariano Massimiliano Croce, Full Professor of Finance whose research focuses on general equilibrium models in which there is uncertainty about the long horizon perspectives of the economy.

“Fiscal interventions that are supposed to be pro-growth may come at the cost of dimmer long-term growth”, he says. “Increasing the debt-to-output ratio to deal with transitory crises creates uncertainty about how the government will pay the debt and thus about the future fiscal burden. This uncertainty discourages investments in innovation that contribute to long-term growth”.

Mariano Croce and his co-authors have empirically tested this model using data from fifteen developed Countries, including Italy. They have found that, when the government is slow in adjusting debt-to-GDP ratio, production and consumption worsen, while long-run uncertainty and long-run downside risk increase. “There is a trade-off between short-run stabilization and long-term growth. We must therefore be cautious in using fiscal interventions that are supposed to be pro-growth. A rapid reduction of the debt-to-GDP ratio, on the other hand, can enhance the values of innovation and aggregate wealth”.

Read more about this topic:
Financial Crises: Who Can Predict Them and How. By Carlo Favero
The Lunar Algorithm That Predicts the Future
The Controllers That Report the Risk of a Crisis
How Companies Overcome a Crisis



by Claudio Todesco

News

All News
  • Bocconi's School of Law Joins the American Society of Comparative Law

    The association, founded in 1951, publishes the prestigious American Journal of Comparative Law  

  • Saving the Oceans from the Land: The Role of Businesses

    Two thirds of Mediterranean businesses are unaware of their impact on marine sustainability or are inactive in mitigation. But there is hope, thanks to the 34% of companies defined as sustainability leaders, according to a Report for the One Ocean Foundation by researchers from SDA Bocconi, McKinsey, and CSIC  

Seminars

  November 2019  
Mon Tue Wed Thu Fri Sat Sun
        1 2 3
4 5 6 7 8 9 10
11 12 13 14 15 16 17
18 19 20 21 22 23 24
25 26 27 28 29 30  

Seminars      

All Seminars
  • Bank Transparency and Deposit Flows

    Itay Goldstein, Wharton University of Pennsylvania

    Meeting Room 2.e4.sr03 - Via Roentgen, 1

  • Bayesian Auctions with Efficient Queries
    Economic Theory, Decision Theory and Experimental Economics

    Jing Chen (Stony Brook University) Paper

    Seminar Room 3.e4.sr03 - Via Roentgen 1