DEMB Working Paper Series N. 32. Capital Inflows, Current Accounts and Investment Cycle in Italy: Barbara Pistoresi * Alberto Rinaldi **

Transcription

1 DEMB Worng Paper Seres N. Capal Inflows, Curren Accouns and Invesmen Cycle n Ialy: 86-9 Barbara Psores * Albero Rnald ** Aprl 4 * ** Afflaons and addresses of he auhors: Dparmeno d Economa Marco Bag and ReCen, Unversà d Modena e Reggo Emla, Vale Berengaro 5, 4 Modena Ialy emal: barbara.psores@unmore. Correspondng auhor: Dparmeno d Economa Marco Bag Unversà d Modena e Reggo Emla, Vale Berengaro 5, 4 Modena Ialy emal: albero.rnald@unmore. ISSN: 8-44X onlne [ ]

2 Barbara Psores and Albero Rnald CAPITAL INFLOWS, CURRENT ACCOUNTS AND INVESTMENT CYCLE IN ITALY: 86-9 Absrac: By relyng on a new daase, hs paper presens an economerc sraegy o es he Fenoalea s hess wh regard o boh he geness of curren accoun flucuaons and of he nvesmen cycle. We perform a Granger causaly es ha shows ha he perssen curren accoun defcs n he years from unfcaon from WW were generaed by varaons n capal nflows, as poned by Fenoalea, and no by he dynamcs of he GDP, as clamed by he Bonell-Cafagna model. Fnally, hs paper suppors he Fenoalea s hess ha hese capal nflows promped a general nvesmen cycle whch ncluded boh consrucon and ndusral nvesmens. JEL Code: F4; O; N; N7 Keywords: Capal mpors, curren accouns, nvesmen cycle, Ialy, negraon, conegraon and Granger causaon analyss

3 . Inroducon The dynamcs of Ialy s balance of paymens (BOP) n he years of he classcal gold sandard has been wdely debaed. Unl he 98s, he prevalng vew was broadly Keynesan (Bonell 978; Cafagna 989). I was assumed ha expors were oally exogenous, deermned by core counry demand for he naon s producs, whle mpors are a funcon of he naon s GDP. In hs scenaro, he rade balance and, more generally, he curren accoun (CA) balance s seen as hghly sensve o he domesc rae of growh; f he rae exceeds some hreshold level, he balance would be plunged no defc. In he shor run, hs defc can be fnanced by sellng reserves or by mporng capal, whle n he medum run, devaluaon can provde some relef. owever, devaluaon s a bes a sop-gap measure, snce prces are nelasc. In he long run, he only effecve soluon o CA problems s a lower growh rae. Afer polcal unfcaon n 86, Ialy was a relavely bacward and resource-poor counry, whch requred massve nvesmen n plan, equpmen and modern nfrasrucure o promp ndusralzaon. Snce he mpor conen of domesc oupu growh was large, he problem was o fnd he way o ease CA pressures. Accordng o hs vew, a long wave of growh began n he lae 8 h cenury well before Ialy s polcal unfcaon smulaed by an expanson of agrculural expors, parcularly raw sl. The upswng also permed mpors of raw maerals and semmanufacured goods o ncrease whou pung pressure on he CA. The agraran crss of he 88s pu an end o he leadng role of agrculure as Ialy s expor engne bu, by ha me, oher secors (especally exles and oher manufacures) had aen up he slac and a mx of emgran remances and oursm helped o fnance growh-nduced mpors. In recen years, he Cafagna-Bonell vew has been urned upsde-down. I s now assumed ha he drvng force was capal flows, and ha he balance of rade and he CA balance adused o hem. When capal flowed n, for whaever reason, he CA balance was n defc; when Ialy expored capal, he CA balance was n surplus. Two hypohess have been pu forward abou wha drove capal flows. Fraann and Spnell (984) and, more explcly, Spnell (988) focus on he dfference beween acual and desred money supply n he framewor of he moneary heory of BOP. Ialy expored capal (and he lra deprecaed) when he money supply (drven up by sae defc) exceeded he desred one, hereby forcng he naon o abandon he pary wh gold, as was he case from 866 o 88. Insead, Fenoalea (988, ) sresses he role of he decsons by core counres nvesors especally Brons abou he profably and rss of domesc and foregn nvesmen. When, as n he 88s, hey preferred nvesng abroad, he world capal mare

4 was flooded wh lqudy, and all perpheral counres ncludng Ialy mpored huge quanes of capal. As s well-nown, capal nflows and he CA defc move ogeher. In general, eher may cause he oher. The CA balance s he heorecal varable n Fenoalea s argumen. owever, as he movemen of goods s he leas unceran componen of Ialy s BOP, hs auhor n hs emprcal nvesgaon uses he rade balance as a proxy for he CA balance. Fenoalea () observed ha a BOP equlbrum can be dsurbed by mpulses ha arse n he mare for goods, or n he mare for capal. In he former case, f a rade defc appears because of an ncrease n mpors, ends o reduce he real exchange rae (eher hrough a devaluaon of he currency, wh flexble exchange raes, or hrough a reducon of he nernal prce level, relave o he foregn one, wh fxed exchange raes). The rade defc s covered by nduced capal nflows: wh flexble exchange raes he devaluaon of he currency may be seen as emporary, causng speculave purchases of he naon s currency n vew of s subsequen recovery; wh fxed exchange raes he loss of currency causes a ne demand for lqudy ha aracs foregn loans. In he even, he rade defc and capal mpors ncrease ogeher, accompaned by a declne n he real exchange rae. If he nal equlbrum s dsurbed n he oppose sense, by an ncrease n expors, he rade defc and capal mpors declne ogeher, whle he real exchange rae ncreases. In he alernave scenaro, a BOP dsequlbrum appears because he naon mpors more capal han before. As a resul, he real exchange rae rses (as he currency apprecaes, or he domesc prce level ncreases relave o he foregn one). Ths rse n he real exchange rae n urn ncreases he rade defc: he rade defc and capal mpors agan rse ogeher, and he real exchange rae rses oo. If he nal equlbrum s dsurbed n he oppose sense, by a reducon n capal mpors, he rade defc and capal mpors declne ogeher, and he real exchange rae also declnes. The rade defc and capal mpors move ogeher n any case: bu wh parallel movemens n he real exchange rae f he nal mpulse s n fnancal mares and he capal flows cause he rade defcs, and wh oppose movemens n he real exchange raes f he nal mpulse s n he goods mare and he rade defcs cause he flows of capal. Fenoalea showed ha, pror o WW, he Ialan currency was srong when he rade defcs and capal flows were hgh, and wea when hey were low. Wh a bref excepon n he early 87s, he movemen n he real exchange rae was parallel o ha n he rade defc and capal mpors: he rade-defc cycle was generaed by he capal-mpor cycle, and no vce-versa. In Fenoalea s analyss capal flows are no only he deermnan of BOP flucuaons, bu also he man cause of busness cycles n Ialy. In an aemp o explan Ialy s economc growh and flucuaons, Fenoalea (988) argued ha swngs n Ialan consrucon and n oher acves were

5 srcly supply-nduced, drven by flucuaons n Brsh capal expors ha were, n urn, deermned by nvesor senmen n Bran. Capal nflows n Ialy were due o an abundance of foregn supply, and no o he pressure of nvesmen demand exceedng domesc savng: capal nflows were he cause, and no he effec, of he consrucon cycle. In a more recen formulaon, Fenoalea () held ha exogenous capal nflows promped no us he consrucon cycle, bu a more general nvesmen cycle n Ialy. Consrucon and ndusral nvesmen were par of he same cycle: boh were hgh when capal nflows were abundan and were low when foregn capal whdrew from he counry. Thus, he mananed ha Ialy s nvesmen cycle was no more han he Ialan componen of a world-wde cycle n capal formaon common o he fnancal perphery as a whole. The wllngness of non-ialans o nves n Ialy rose and fell wh her wllngness o nves n foregn asses n general and, conrary o wha was argued by oher auhors.e., Warglen (987) and, more recenly, Bolchn (6), Cocca (6) and De Cecco (6) only margnally nfluenced by he flucuaons n he supply of domesc capal. Ths means ha he Ialan cycle n capal formaon (and, dervavely, n ndusral and oal producon) was se n moon no by domesc economc and polcal facors bu by exernal, globe-spannng evens over whch Ialan governmens had no or very lle conrol. By relyng on a new daase, hs paper presens an economerc sraegy o es he Fenoalea s hess wh regard o boh he geness of he CA flucuaons and of he nvesmen cycle. Usng negraon, conegraon and Granger causaon analyss we fnd he followng resuls. Ialy s CA o GDP seres s no saonary over he 86-9 years, due o perssen defcs n he 86s, n he 88s and n he fve years pror o WW. By analysng he geness of CA flucuaons we fnd ha hese were generaed by varaons n capal nflows, as n Fenoalea, and no by he dynamcs of he GDP, as n he Bonell-Cafagna vew. Lasly, we fnd ha hese CA defcs rggered a general nvesmen cycle whch ncluded boh consrucon and ndusral nvesmens. Ths paper s srucured as follows. Afer hs Inroducon, secon presens he sources and daa we have used n our analyss. Secon llusraes he evoluon of Ialy s BOP and real nvesmen seres from Unfcaon n 86 o 9. Secon 4 presens an economerc sraegy o es Fenoalea s hess accordng o whch n he years Lasly, Secon 5 concludes. These laer conrbuons are publshed n Bolchn e al. (6). 4

6 . Sources and daa In 957 he Ialan naonal sascal offce produced he frs esmae of Ialy s BOP for he perod (Isa 957). owever, several obecons were rased agans hese seres, whch proved unrelable and nernally nconssen. In parcular, as far as he years pror o WW are concerned, Isa seems o have sgnfcanly overesmaed he earnngs of servces, and especally of oursm (Marolla and Roccas 99; Zamagn 99). Bu, above all, Isa emgrans remances seem excessvely varable. In fac, hese esmaes appear o be based on he gross flow of mgrans, whch smlarly umps up n 9 and 95, whereas remances seem more reasonably ed o he savngs by he soc of Ialans abroad, whch grew more smoohly from under one mllon n 87 o some sx mllon n 9 (Fenoalea ). To acle such crcsm, Morys (6) presened a new and more relable seres of Ialy s BOP for he perod The maor dfference wh regard o he Isa seres concerns he crera ha have been used o esmae emgrans remances. In he absence of good daa relang o he money ransferred by Ialan emgrans, Morys reled on he number of emgrans and approxmaed wha an average Ialan emgran would ransfer home n hs frs, second, hrd ec. years based on some general rules on wha deermnes he paern of remances ha have been dscussed n he nernaonal leraure on emgraon. As hs auhor reconsruced also he remances for Ausra- ungary for whch much beer daa are avalable he could double-chec hs resuls and found ha he seres for hs laer counry was very close o he one he consruced by usng he general rules presened n he leraure. As o he GDP seres, Isa (957) presened an esmaes of Ialy s naonal accouns for he years whch ncluded a dealed reconsrucon of boh producon sde and expendure sde a curren prces, and of he laer alone a consan (98) prces; 98-prce produc seres were also provded for core agrculure (culvaon and herdng) and for manufacurng ndusry. owever, hs wor laced ey seres (such as oupu by secor a consan prces), deals on mehodology and sources, and an approprae degree of sepcsm abou offcal sascal sources (Cohen and Federco ). These seres were only parally mproved by a eam of scholars led by he economs Gorgo Fuà, whch provded new esmaes of value added by secor a consan (98) prces, mplc deflaors by secor and use, and a comprehensve seres on he capal soc from 88 onwards (Ercolan, 969; Fuà, 965, 969; Val, 969). Ye, he Fuà eam dd no aemp o rebuld he core of he wor by Isa: he esmaes of value added a curren prces. For hs reason many scholars, roubled by flaws n he orgnal daa, remaned unconvnced by hs revson (Cohen and Federco ). 5

7 I was only on occason of he 5 h annversary of Ialy s unfcaon, celebraed n, ha a proec coordnaed by he Ban of Ialy presened a reconsrucon of he naonal accouns, complee n boh he producon and expendure sdes, for he whole cenury and a half snce unfcaon (Baffg ; Brune, Felce and Vecch ). In hs paper, we es he Fenoalea s argumen by usng a new daase whch, for he CA, uses he Isa (957) seres for he years and he Morys (6) seres for he years As o GDP, oal nvesmens; nvesmen n consrucons; and nvesmens n plan, machnery, and ranspor equpmen reles on he new seres ha have been provded by he Ban of Ialy for he 5 h annversary of he naon s polcal unfcaon (Baffg ). Lasly, he seres of Ialy s real exchange s drawn from Fenoalea ().. The evoluon of Ialy s curren accouns Fgure shows he evoluon of Ialy s BOP from 86 o 9. The dynamcs of he CA o GDP and of he rade balance o GDP raos are dsncly repored. The rade balance was negave hroughou he perod under nvesgaon. Ths perssen defc was a leas parally covered by oher headngs of he CA balance, above all remances of Ialan emgrans abroad and oursm. As a resul, he CA balance performed far beer and was posve n years ou of 54. A perssen CA surplus was obaned for egheen years n a row from 89 o 98. owever, here were also hree perods of perssen CA defcs: 86-7, 879-9, and 99-. Ialy followed a bmeallc sandard from 86 o 866, when converbly was suspended n he wae of war agans Ausra. Ialy re-enaced gold converbly n 88, bu was forced o suspend spece paymen agan n 89. Mn pary was acheved agan n 9 and mananed unl he oubrea of WW, bu converbly of ban noes no spece was no nroduced. In sum, Ialy was he ure on gold from 88 o 89 and de faco on gold from 9 o 94 (Morys 6). The nomnal exchange rae of he lra was herefore sem-flexble, n he sense ha could fall below he meal pary of he currency un bu no rse above. Wh he nomnal exchange rae a par, he real exchange rae rses wh an ncrease n he domesc prce level, relave o ha abroad (world-wde, commody prces fell from he early 87s o he md-89s, and hen rose seadly). Bu he domesc prces of mpored goods reman ed o her foregn prces, convered no lre a a consan exchange rae; he relave ncrease n he domesc prce level s due enrely o he ncrease n he prce of he goods leas subec o mpor compeon, real esae and servces frs and foremos. Thus, Fenoalea (: Table.5) calculaed he real ren ndex and used as a proxy of real exchange. We also use n our daase. By conras, Span showed perssen CA defcs from 85 o 89. These were followed by a perod, beween 89 and 9, n whch surpluses prevaled, wh he excepon of he years (Prados de la Escosura ). 6

8 Fg. CA/GDP and TB/GDP raos n Ialy (86-),4,,,4 CA/GDP TB/GDP,6,8, Legend: CA/GDP = Curren Accoun o GDP rao; TB/GDP = Trade Balance o GDP rao. Fgure shows he dynamcs of real nvesmens n Ialy: he seres of nvesmens n consrucons; n plan, machnery and ranspor equpmen; and oal nvesmens are dsncly repored. Toal nvesmens grew from 86 o 865, bu hen hey declned for e few years n he wae of he war agans Ausra. They doubled from 87 o 874 (he so-called feversh rennum ); afer ups and downs hey dropped bac n he lae 87s. The 88s saw anoher upswng, whch was followed by a fall n he followng decade. Invesmen began o accelerae sharply a he end of he 9 h cenury unl 97. Ths was he year of world crss, when Ialy s accumulaon acvy reached a pea whch was followed by anoher fall n he fve years leadng o WW. In bref, n he years from Unfcaon o WW he Ialan economy wen hrough a number of nvesmen cycles ha were characerzed by phases of rapd growh followed by sharp downward swngs. Flucuaons over me were sharper n ndusral nvesmens (plan, machnery and ranspor equpmen) han n consrucon. Indusral nvesmens also exhbed a hgher growh rend: n 86 nvesmens n consrucons were hree mes as hgh as hose n plan, machnery and ranspor equpmen, whereas n 97, a he pea of he Ialan pre-ww nvesmen cycle, he laer were hree mes as hgh as he former. The hgher dynamcs of ndusral nvesmen, as compared o nvesmen n oher secors, rggered srucural change n he Ialan economy and 7

9 faclaed a shf of producve facors from low o hgh producvy acves, especally from agrculure and consrucons o manufacures. Anoher pon o be emphaszed s ha upswngs n he nvesmen cycle occurred a a me when he CA balance was n defc or showed a sharp decrease of s surpluses. The only excepon s represened by he years from 9 o 95, whch were characerzed by boh a boom n nvesmen acvy and growng CA surpluses, whch were due o he ncreasng revenues from emgrans remances. owever, he 97 pea n he nvesmen cycle was preceded by a sharp declne n he CA surpluses n 95 and 96. Fg. Real nvesmens n Ialy (86-9)* 5 5 Consruco Plan, mach equpmen Toal nves 5 * Values n housands euros, 9 prces 4. Tesng he Fenoalea s hess: an economerc sraegy Perssen exernal defcs can consran economc growh because hey can ncrease he neres raes he naon has o pay o arac foregn capal, and mpose an excessve burden on fuure generaons ncreasng neres paymens and lowerng he sandard of lvng. Ths s he hess underlyng he Bonell-Cafagna vew. owever, here are also cases n whch perssen CA defcs 8

10 are no lned o severe domesc macroeconomc mbalances and hence hey do no curb economc developmen. As ancpaed n he Inroducon, Fenoalea () suggess ha Ialy s exernal defcs n he years 86-9 were deermned by capal nflows, ha boosed he nvesmen cycle,.e., hey were used o fnance nvesmens n consrucons and he mpors of machnery, echnology, raw maerals, and oher capal goods, whch n urn promped economc growh. ence, a BOP dsequlbrum appears because he naon mpors more capal han before. As a resul, he real exchange rae rses (as he currency apprecaes, or he domesc prce level ncreases relave o he foregn one). Ths surge n he real exchange rae n urn ncreases he rade defc and he CA defc (as he rade balance s by far he man componen of he CA balance): he rade defc and capal mpors rse ogeher, and he real exchange rae rses oo. A smlar argumen holds f he nal equlbrum s dsurbed n he oppose sense, by a reducon n capal mpors: he rade defc and capal mpors declne ogeher, and he real exchange rae also declnes. Fenoalea shows ha, pror o WW, he Ialan currency was srong when he rade defcs and capal flows were hgh, and wea when hey were low. Wh a bref excepon n he early 87s, he movemen n he real exchange rae was parallel o ha n he rade defc and capal mpors: he rade-defc cycle was generaed by he capal-mpor cycle, and no vce-versa. The ncreasng negraon of capal mares n he years of he classcal gold sandard led Ialy o parcpae fully n he fnancal relaons beween he core and he perphery of he world economy. The world cycle n capal flows semmed from he long swng n he confdence of core counres nvesors especally Brsh savers n he nvesmen n he perphery. Daa on he premum requred o nves n Ialan bonds show ha followed a paern smlar o ha of he enre perphery. Thus, he Ialan nvesmen cycle seems o have been no more han he Ialan componen of a world-wde nvesmen cycle: he wllngness of non-ialans o nves n Ialy rose and fell wh her wllngness o nves n he perphery as a whole, whou sgnfcan peculares ed o Ialy self. The Fenoalea s argumen can be represened by hs sequence of causaon (henceforh, Fenoalea s cycle): Foregn capal nflows real exchange rae rade defcs CA defcs real nvesmen 9

11 Ths nexus among he changes n real exchange rae, CA balance and real nvesmen can be analysed n an economerc framewor by usng echnques approprae for esmang long run equlbrum and esng causaon. In he case of me seres daa a es for he drecon of causaon s suggesed by Granger (969). For smplcy, Equaons () o (4) presen he esng sraegy for he bvarae case. A varable X mproves he predcon of a varable Y, ha s X Granger causes Y, f curren Y can be predced beer by usng pas values of X han by no dong so, gven ha all oher pas nformaon n he nformaon se s used. Suppose X and Y are lnear covarance saonary me seres. 4 Thus X and Y can be wren as follows: m () X a X m () Y cy n n d b Y X u where, u are zero mean and fne covarance marx random vecor. The causaly es s a) X causes Y f : d,,..., n s reeced b) Y causes X f : b,,..., n s reeced Bdreconal causaly occurs f boh (a) and (b) hold. Undreconal causaly from X o Y occurs f (a) holds bu (b) does no. In order o es hese null hypohess n (a) and (b), F sascs are calculaed for only sgnfcance of he d n equaon () and for b n equaon (). For he Granger causaon es, he hypohess of covarance saonary of he me seres used s crucal o avod spurous resuls. In general, he levels of he me seres are no covarance saonary whle her frs dfference are saonary. The frs dfference of hese varables ( X and Y ) are saonary, whle X and Y are no. If hese are he sascal properes of he varables, we can only es for Granger causaon by usng frs dfference saonary models, ha s 4 Tme seres are sad o be covarance saonary f her momens up o he second order do no depend on me. ence, for nsance he mean mus be consan and he shocs affecng saonary seres have only emporary effecs. These me seres are also sad I(). By conras a seres s sad o be dfference saonary f s frs dfference s saonary bu he seres self s no. A propery of dfference saonary seres s ha hey do no have necessarly consan means and he varance grows wh me whou lm, moreover he shocs affecng hem are permanen. These seres are also sad I().

12 () m n Y b X a X (4) m n u X d Y c Y owever, he nexus among real exchange rae, CA defc (or surplus) and real nvesmen may be a long run relaonshp. If hs long run nexus exss bu we do no nclude n he esmaon of models () and (4) we have ms-specfcaon and spurous causaly. ence, we have o es for Granger causaon, o ae no accoun he possble long run relaonshp among he levels (values) of real exchange rae, CA, and real nvesmen among her shor run dynamcs. Granger ype causaly ess for a long run relaonshp are vald f he relevan varables are found o be conegraed, ha s hey move ogeher so closely over he long run ha hey share a sochasc (and possbly also deermnsc) rend n common. In hs laer case, as sressed by Granger (988), here s a presumpon for causaly o run n a leas one drecon. Suppose X s he CA o GDP rao, Z he real exchange rae and Y s he real nvesmen. Moreover suppose hese seres are no covarance saonary, bu hey are conegraed co-movng over me. In hs case a hree varables generalzaon of he Granger causaly es, as n pon (a) and (b) saed before, mus be performed on he followng ECM models: (5) m n K ECT Z e Y b X a X (6) m n K ECT Z f X d Y c Y (7) m n K ECT X l Y h Z g Z where ECT s he error correcon erm derved by conegraon analyss represenng he long run equlbrum among he varables. Suppose ha he conegraon does no exss among hese varables he ECM models above collapse n hese shor run specfcaons (ADL models) (8) m n K Z e Y b X a X

13 m (9) Y cy d X n m () Z gz hy n K K f Z l X The Fenoalea s hess saes ha he real exchange rae dynamcs s exogenous wh respec o CA and nvesmen varables, ha s only depends on s pas values. Ths mples h = l = n model (). CA varaons are Granger caused by real exchange rae dynamcs and hence b n model (8), whle he dynamcs of real nvesmen s Granger caused by he CA flucuaons. Ths laer mples ha n model (9) possbly f. The exsence of hs me lags srucure n he above models s usfed as follows: a) I aes me for a change n real exchange rae o affec mpor and expor spendng, so he change n curren accoun lags he change n real exchange rae; b) I aes even more me o nsall capal equpmen, so ha nvesmen can lag he real exchange rae and he curren accoun varaons. Ths me lag srucure maes sense snce Fenoalea () sresses ha n pos-unfcaon Ialy real he exchange rae was flexble. If for more han a half of he years from 86 o 9 he nomnal exchange rae was fxed o mn pary, boh prces and wages were flexble hereby geng he real exchange rae adused by movemens n he relave prce levels. When, from 866 o 88 and agan from 89 o 9, he converbly of he Ialan lra was suspended, he real exchange rae was doubly flexble as s adusmen was pushed by movemens n boh nomnal exchange rae and he relave prce levels. To sum up, he causaly esng procedure nvolves hree seps. The frs sep s o es wheher our varables of neress are saonary or no (negraon analyss). If hey are no saonary, he second sep s o es for conegraon, ha s for he exsence of long run relaonshps among hem. If conegraon exss, Granger causaly mus be esed on he ECM models 5-7, f conegraon does no exs, on models 8-. ence, n he followng we presen he resuls of he unvarae negraon analyss on he seres. 5 In parcular, Table summarzes he fnal oucomes for ADF (OLS/GLS) and KPSS ess for he 5 We perform ADF ess (OLS/GLS) and KPSS es. The null of he ADF ess s non saonary seres (un roo) whle he null of he KPSS s saonary seres. ence, f boh reec her nulls hen we have no confrmaon, bu f es ADF reecs he null bu es KPSS does no (or vceversa) we have confrmaon. See Dcey and Fuller (979) and

14 levels and frs dfferences of he varables nvolved n he Fenoalea s cycle by usng dfferen specfcaons and lags. All he varables n levels are non saonary, n parcular I(), so we need o use n our analyss her frs dfferences. Table shows ha here s no conegraon beween he varables nvolved n he Fenoalea s cycle: he relaonshps among real exchange rae, CA o GDP rao, and dfferen real nvesmen seres have a shor-medum erm naure, ha s hese varables do no share common rends n he long run. 6 Ths resul mples ha we have o use he ADL models 8-. Tables o 5 presens he resuls of Granger causaly for dfferen ADL models (dfferen lags). From all he specfcaons n all he Tables he exogeney of he real exchange rae srongly emerges: changes n he CA o GDP rao and n nvesmen do no cause varaons n he real exchange rae. Tha s, n he years 86-9 real exchange rae movemens seem o be due o exernal shocs,.e. n foregn capal nflows as suggesed by Fenoalea. Moreover, Tables o 5 presen he Granger causaon analyss ncludng he varaons n real nvesmen o close he Fenoalea s cycle. In parcular, Table consders he real nvesmen n plan, machnery and ranspor equpmen; Tables 4 he real nvesmen n consrucons, and Table 5 he real oal nvesmen. All he ADL specfcaons (for dfferen lags) presened n hese Tables suppor Fenoalea s argumen. We fnd undreconal Granger causaon from real exchange rae o he CA o GDP rao: Ialy s perssen exernal defcs n he years 86-9 were deermned by capal nflows and no by mpulses ha rose n he mare for goods. We also fnd undreconal Granger causaon from he CA o GDP rao o all he real nvesmen seres we consder. Tha s, seems ha CA defcs were used o rgger a general nvesmen cycle whch ncluded boh consrucon and ndusral nvesmen. Unforunaely, daa ha dsaggregae capal nflows beween FDI and porfolo nvesmens are no avalable for pre-ww Ialy. Noneheless, s well-nown ha, sarng from he 88s, foregn capal flew o Ialy o boos nvesmens n ranspor (ralways and ramways) and ules (gas, lgh and waer supply) whch susaned a progressve process of urbanzaon n he larges ceners of he pennsula, as Mlan, Genoa, Turn, and Naples. A he same me, foregn enrepreneurs sared successful venures capal- and echnology- nensve ndusres, such as elecrcy and elecro-mechancs, bu also n coon (Zamagn 978). Kwaows e al. (99). For a dealed analyss of he resuls of he negraon analyss by usng ADF (GLS) and KPSS see Psores and Rnald (). 6 The no conegraon resul s also obaned wh DOLS and Johansen conegraon procedure. For DOLS see Soc and Wason (99) whle for Johansen procedure see Johansen (99).

15 On he eve on WW, here were several ndusres n Ialy ha were characerzed by a subsanal presence of foregn capal. In he energy ndusry (bascally, elecrcy), FDI accouned for nearly 5 per cen of he oal capal nvesed n ha secor. Moreover, foregn-owned frms conrolled per cen of share capal n he exle ndusry, 4 per cen n elecrcal equpmen, per cen n chemcal. Tha s, FDI ended o prvlege hose ndusres n whch Ialan enrepreneurshp was weaer and n whch he amoun of capal needed for nvesmen was larger and no mmedaely avalable on he domesc fnancal mare (Coll ). In he 88s, he nroducon of gold sandard and a massve nernaonal gold loan whch came wh, boosed nvesmen n he real esae and consrucons especally for he developmen of he capal of he newly creaed Kngdom of Ialy, Rome (D Marno ). Inernaonal porfolo nvesmens n Ialy were prncpally consued by he purchase of Ialy s soveregn bonds by foregn nvesors (D Marno ). The share of Ialy s publc deb n foregn hands amouned o. per cen n 86 and reached a 4.5 per cen pea n 889. Then progressvely decreased up o a.5 per cen mnmum n 96, whch was followed by a new ncrease ha led o. n 9 (Zamagn 99). In addon o servcng o publc deb, hs money was used for he seng-up of he sae s nsuons and he creaon of nfrasrucures. As o he former, he army, he navy and educaon made he lon s share. Mlary procuremens provded he man busness opporunes o he frs prvae bg busnesses. The procuremen necesses of he Navy drove n 884 o he esablshmen of he frs large-scale ron and seelwor n Tern. As o he laer, he bul of he spendng wen o he consrucon of he naon s ralways newor. The man long-dsance ralway lnes were lad down n he 86s and early 87s; local newors followed n he 88s and 89s (Schram 997). Alhough he lnes were prvaely owned unl 884, hey were heavly dependen on sae subsdes and even hen requred wo massve nervenons o preven banrupcy before he Ialan rals were naonalzed n 95 (Cohen and Federco ). A leas unl he end of he 9 h cenury, ralways had lle effec n leadng he expanson of Ialy s bacward engneerng and meallurgcal ndusres. By conras, he mpac of ralways on he consrucon ndusry was more sgnfcan: durng he wo man nvesmen cycles n he ralways n he 86s and n he 88s abou one-hrd of value added n he consrucon ndusry was due o he demand from he Ialan ralways (Fenoalea 98). Moreover, new roads were lad down, he elegraph and posal sysems were developed n order o reach he mos remoe areas n he counry, and n 88 also he publc elephone newor enered n operaon. As a resul, from 86 o 9 he Ialan ralways rose from,89 o 7,649 m; roads from, o 48, m (no ncludng local roads); he elegraph lnes from 9,86 o 5,58 4

16 m; he number of pos offces from, o 9,87; and elephone subscrbers from zero o 89,84 (Zamagn 99). 5. Conclusons By usng Granger causaon analyss and a new daase, hs paper ess he Fenoalea s hess wh regard o boh he geness of CA flucuaons and of he nvesmen cycle over he 86-9 years. The economerc resuls sugges ha he perssen defcs n he 86s, 88s and n he fve years pror o WW were generaed by varaons n capal nflows, as n Fenoalea, and no by he dynamcs of he GDP, as n he Bonell-Cafagna vew. Ths paper also fnds evdence n suppor of he Fenoalea s hess ha hese CA defcs rggered a general nvesmen cycle whch ncluded boh consrucon and ndusral nvesmens ence, Ialy s perssen CA defcs seem o have resuled from capal nflows ha allowed nvesmen o rse and, n urn, o boos economc growh. Capal nflows conssed of boh FDI and porfolo nvesmens. The former flew o ranspors, ules and o capal- and echnology- nensve ndusres such as energy, elecrcal equpmen, chemcals n whch Ialan enrepreneurshp was weaer. The laer were prncpally consued by he purchase of Ialy s soveregn bonds by foregn nvesors. In addon o servcng o publc deb, hs money was used for he seng-up of he sae s nsuons and he creaon of nfrasrucures, among whch he naonal ralway newor sood ou. 5

17 Tables Table. Saonary of Ialy s curren accoun o GDP rao, real exchange rae, real oal nvesmen, real nvesmen n machnery and equpmen, real nvesmen n consrucon- A summary Varable LAGS used n he ADF and KPSS ess Degree of negraon from he ADF es - OLS Degree of negraon from he ADF es GLS Degree of negraon from he KPSS es Curren Accoun /GDP CA/GDP I()/I() I() I() CA/GDP I()/I() I()/I() I() CA/GDP 4 I() I() I() Δ (CA/GDP) I() I() I() Δ (CA/GDP) I() I() I() Real Exchange rae I() I() I() I() I() I() 4 I() I() I() Δ I() I() I() Δ I() I() I() Real oal nvesmen real Toal I I() I() I() real Toal I I() I() I() real Toal I 4 I() I() I() Δ real Toal I I() I() I() Δ real Toal I I() I() I() Real nvesmen n plan, machnery and ranspor equpmen real IE I() I() I() real IE I() I() I() real IE 4 I() I() I() Δ real IE I() I() I() Δ real IE I() I() I() Real nvesmen n consrucons real IC I() I() I() real IC I() I() I() real IC 4 I() I() I() Δreal IC I() I() I() Δreal IC I() I() I() Noes: I() means saonary seres (no un roo s presen). I() means non saonary seres (.e presence of a leas one un roo). Noe hese ess are avalable on a prelmnary draf of he paper (Psores and Rnald, ). For real nvesmen consrucon seres, he resuls are avalable on reques. 6

18 Table. Long run comovemens (common rends) among curren accoun o GDP rao, real exchange rae, and real nvesmen seres (logs) - Engle and Granger conegraon analyss Engle Granger long run regresson: Varables CA/GDP, ε CA/GDP, ε, real nvesmen (oal) CA/GDP, ε, real IE (plan, machnery and ranspor equpmen) CA/GDP, ε, real nvesmen (consrucon) CA / GDP realgdp : un roo n, no conegraon Tes = -.65, p- value =., does no reec : NO COINTEGRATION Tes = -.77, p- value =.6, does no reec : NO COINTEGRATION Tes = -.86, p- value =., does no reec : NO COINTEGRATION Tes = -.5, p- value =.5, does no reec : NO COINTEGRATION Noes: 5% crcal values fo he Engle Granger ADF es for conegraon: -.8 ( wo regressors ncluded) -4.6 (hree regressors ncluded) see Phlps Oulars (99). P-values n Mac Knnon (996). The no conegraon resul s also obaned Johansen conegraon procedure - Johansen (99). 7

19 Table. Curren accoun o GDP rao, real exchange rae and real nvesmen n plan, machnery and ranspor equpmen - Granger causaly CA / GDP ( CA / GDP ) realie... : he pas does no maer ADL(,) : ADL(,) : ADL(,) : F es p-value Oucome Concluson p-value =.6 p-value =.84 p-value =.6 Fal o reec Fal o reec Fal o reec Changes n I growh do no cause CA/GDP Changes n I growh do no cause CA/GDP Changes n I growh do no cause CA/GDP ADL(,) p-value =.6 : Reec (6%) Changes n exchange rae cause CA/GDP ADL(,) p-value =.4 : Reec Changes n exchange rae cause CA/GDP ADL(,) p-value =. : Reec Changes n exchange rae cause CA/GDP LrealIE ( CA / GDP ) realie... : he pas does no maer ADL(,) : ADL(,) : ADL(,) : ADL(,) : ADL(,) : ADL(,) : F es p-value Oucome Concluson p-value =.5 p-value =. p-value =. p-value =. p-value =.76 p-value =.5 Reec Reec Reec Fal o reec Fal o reec Fal o reec Changes n CA/GDP cause I growh Changes n CA/GDP cause I growh Changes n CA/GDP cause I growh Changes n exchange rae do no cause I growh Changes n exchange rae do no cause I growh Changes n exchange rae do no cause I growh CA / GDP ) realie... ( : he pas does no maer ADL(,) : ADL(,) : ADL(,) : ADL(,) : ADL(,) : ADL(,) : F es p- value p-value =.7 p-value =.94 p-value =.8 p-value =.9 p-value =.8 p-value =.4 Oucome Fal o reec Fal o reec Fal o reec Fal o reec Fal o reec Fal o reec Concluson Changes n CA/GDP does no cause exchange rae Changes n CA/GDP does no cause exchange rae Changes n CA/GDP does no cause exchange rae Changes n I growh do no cause exchange rae Changes n I growh do no cause exchange rae Changes n I growh do no cause exchange rae Noes: The no conegraon resul mples we esmae an ADL models nsead of an ECM models. Robus sandard errors esmaon. 8

20 Table 4. Curren accoun o GDP rao, real exchange rae and real nvesmen n consrucons - Granger causaly CA / GDP ( CA / GDP ) realic... : he pas does no maer ADL(,) : ADL(,) : ADL(,) : F es p-value Oucome Concluson p-value =. p-value =.55 p-value =.6 Fal o reec Fal o reec Fal o reec Changes n I growh does no cause CA/GDP Changes n I growh does no cause CA/GDP Changes n I growh do no cause CA/GDP ADL(,) p-value =. : Reec (%) Changes n exchange rae cause CA/GDP ADL(,) p-value =. : Reec Changes n exchange rae cause CA/GDP ADL(,) p-value =. : Reec Changes n exchange rae cause CA/GDP LrealIC ( CA / GDP ) realic... : he pas does no maer ADL(,) : ADL(,) : ADL(,) : ADL(,) : ADL(,) : ADL(,) : F es p-value Oucome Concluson p-value =.4 p-value =.6 p-value =. p-value =. 7 p-value =.4 p-value =.5 Fal o reec Fal o reec Reec Fal o reec Fal o reec Fal o reec Changes n CA/GDP does no cause I growh Changes n CA/GDP does no cause I growh Changes n CA/GDP cause I growh Changes n exchange rae does no cause I growh Changes n exchange rae does no cause I growh Changes n exchange rae does no cause I growh CA / GDP ) realic... ( : he pas does no maer ADL(,) : ADL(,) : ADL(,) : ADL(,) : ADL(,) : ADL(,) : F es p- value p-value =.76 p-value =.9 p-value =. p-value =.9 p-value =. p-value =.8 Oucome Fal o reec Fal o reec Reec Fal o reec Fal o reec Fal o reec Concluson Changes n CA/GDP does no cause exchange rae Changes n CA/GDP does no cause exchange rae Changes n CA/GDP does no cause exchange rae Changes n I growh does no cause exchange rae Changes n I growh does no cause exchange rae Changes n I growh does no cause exchange rae Noes: The no conegraon resul mples we esmae ADL models nsead of an ECM models. Robus sandard errors esmaon. 9

21 Table 5. Curren accoun o GDP rao, real exchange rae and real oal nvesmens - Granger causaly CA / GDP ( CA / GDP ) reali... F es p- Oucome Concluson : he pas does no maer value ADL(,) p-value =.4 : Reec Changes n I growh cause CA/GDP varaons ADL(,) p-value =. : Fal o reec Changes n I growh do no cause CA/GDP varaons ADL(,) p-value =. : Fal o reec Changes n I growh do no cause CA/GDP varaons ADL(,) p-value =. : Reec (%) Changes n exchange rae cause CA/GDP varaons ADL(,) p-value =.5 : Reec Changes n exchange rae cause CA/GDP varaons ADL(,) p-value =. : Reec Changes n exchange rae cause CA/GDP varaons LrealI ( CA / GDP ) reali... : he pas does no maer ADL(,) : ADL(,) : ADL(,) : ADL(,) : ADL(,) : ADL(,) : F es p- value p-value =.5 p-value =.6 p-value =.6 p-value =. p-value =.7 p-value =. Oucome Fal o reec Reec (6%) Reec Fal o reec Reec (7%) Reec Concluson Changes n CA/GDP do no cause I growh Changes n CA/GDP cause I growh Changes n CA/GDP do no cause I growh Changes n exchange rae do no cause I growh Changes n exchange rae cause I growh Changes n exchange rae cause I growh CA / GDP ) reali... ( : he pas of he curren accoun does no maer ADL(,) : ADL(,) : ADL(,) : ADL(,) : ADL(,) : ADL(,) : F es p- value p-value =.7 p-value =.96 p-value =.9 p-value =.4 p-value =.5 p-value =.55 Oucome Fal o reec Fal o reec Fal o reec Fal o reec Fal o reec Fal o reec Causaly Concluson Changes n CA/GDP does no cause exchange rae Changes n CA/GDP does no cause exchange rae Changes n CA/GDP does no cause exchange rae Changes n I growh do no cause exchange rae Changes n I growh do no cause exchange rae Changes n I growh do no cause exchange rae Noes: The no conegraon resul mples we esmae an ADL models nsead of an ECM models. Robus sandard errors esmaon.

22 BIBLIOGRAPY BAFFIGI, Albero (), Ialan Naonal Accouns, 86-, Quadern d Sora Economca (Economc sory Worng Papers) No. 8, Banca d Iala, Rome. BOLCINI, Pero, CIOCCA, Perlug, DE CECCO, Marcello, FEDERICO, Govann, TATTARA, Guseppe, TONIOLO, Gann, and ZAMAGNI, Vera (6), A proposo d Sefano Fenoalea, L economa alana dall Unà nazonale alla Grande Guerra, Bar-Roma, 6, Rvsa d sora economca, Nuova sere,, pp BONELLI, Franco (978), Il capalsmo alano: lnee general d nerpreazone, n Ruggero ROMANO and Corrado VIVANTI (eds), Sora d Iala. Annal I. Dal feudalesmo al capalsmo, Enaud, Turn, pp BRUNETTI, Alessandro, FELICE, Emanuele, and VECCI, Govann (), Reddo, n Govann VECCI (ed.), In rcchezza e n poverà. Il benessere degl alan dall Unà a ogg, Il Mulno, Bologna, pp CAFAGNA, Lucano (989), Dualsmo e svluppo nella sora d Iala, Marslo, Vence. COEN, Jon, and FEDERICO, Govann (), The Growh of he Ialan Economy 8-96, Cambrdge Unversy Press, Cambrdge. COLLI, Andrea (), Foregn enerprses (9-7), n Andrea COLLI and Mchelangelo VASTA (eds), Forms of enerprse n h cenury Ialy. Boundares, Srucures and Sraeges, Elgar, Chelenham-Norhampon, MA, pp DICKEY Davd A., and FULLER Wayne A. (979), Dsrbuon of he esmaors for auoregressve me seres wh a un roo, Journal of he Amercan Sascal Assocaon, 74(66), pp DI MARTINO, Paolo (), Corso della Renda e andamen del asso d cambo della Lra negl ann del gold sandard (88-99), Rvsa d sora economca, n.s., 7 (), pp. -. DI MARTINO, Paolo (), Rome wasn bul n a day : lobbes, nsuons and speculaon n he 88s fever, Urban sory, 9 (), pp ERCOLANI, Paolo (969), Documenazone sasca d base, n Gorgo FUÀ (ed.), Lo svluppo economco n Iala, vol., Franco Angel, Mlan. FENOALTEA, Sefano (98), Ialy, n Parc K. O BRIEN (ed.), Ralways and he Economc Developmen of Wesern Europe, Macmllan, London, pp FENOALTEA, Sefano (988), Inernaonal resource flows and consrucon movemens n he Alanc economy: he Kuznes cycle n Ialy, Journal of Economc sory, 48, pp FENOALTEA, Sefano (), The Renerpreaon of Ialan Economc sory: From Unfcaon o he Grea War, Cambrdge Unversy Press, Cambrdge. FRATIANNI, M., and SPINELLI, F. (984), Ialy n he gold sandard perod 86-94, n Mchael BORDO and Anna J. SCWARTZ (eds), A rerospecve on he classcal gold sandard 8-9 (Chcago), pp FUÀ, Gorgo (965), Noes on Ialan Economc Growh , Guffrè, Mlan. FUÀ, Gorgo (969), Lo svluppo economco n Iala, vols, Franco Angel, Mlan. GRANGER, Clve W.J. (969), Invesgang causal relaons by economerc models: cross specral mehods, Economerca, 7, pp GRANGER, Clve W.J. (988), Some recen developmens n he concep of causaly, Journal of Economercs, 9, pp ISTAT (957), Indagne sasca sullo svluppo del reddo nazonale dell Iala dal 86 al 956, Annal d sasca, sere VIII, vol. 9, Isa, Rome.

23 JOANSEN, Soren (99), Esmaon and hypohess es of conegrang vecors n Gaussan vecor auoregressve models, Economerca, 59, pp KWIATKOWSKI, Dens, PILLIPS, Peer C.B., SCMIDT, Peer, and SIN Yongcheol (99), Tesng he null hypohess of saonary agans he alernave of a un roo, Journal of Economercs, vol. 54, MAROLLA, Mauro, and ROCCAS, Massmo (99), La rcosruzone delle blanca nernazonale de servz e rasfermen unlaeral dell anno 9, n Gudo M. REY (ed), I con economc dell Iala.. Una sma del valore agguno per l 9, vol. I.II., Laerza, Rome-Bar, pp MORYS, Ingo M. (6), The Classcal Gold Sandard n he European Perphery: A case Sudy of Ausra-ungary and Ialy, 87-9, PhD hess, London School of Economcs and Polcal Scence. PISTORESI, Barbara, and RINALDI, Albero (), Exernal consran and economc growh n Ialy: 86-, DEMB Worng papers Seres No., Dparmeno d Economa Marco Bag, Modena. PRADOS DE LA ESCOSURA, Leandro (), Span s Inernaonal poson, 85-9, Revsa de sora Económca, 8, pp.7-5. SCRAM, A. (997), Ralways and he formaon of he Ialan sae n he nneeenh cenury, Cambrdge Unversy Press, Cambrdge. SPINELLI, F. (988), Pasquale Jannacone: a negleced orgnaor of he moneary approach o balance of paymens and exchange raes, Journal of European Economc sory, 7, pp. -5. STOCK, James, and WATSON Mar W. (99), A smple esmaor of conegraon vecors n hgher order negraed sysems, Economerca, 6(4), pp VITALI, Ornello (969), La sma del valore agguno a prezz cosan per ram d avà, n Gorgo FUÀ (ed.), Lo svluppo economco n Iala, vol., Franco Angel, Mlan. WARGLIEN, Massmo (987), Invesmen ndusral ed nsablà fnanzara n Iala, Rvsa d sora economca, n.s.,, pp ZAMAGNI, Vera (978), Indusralzzazone e squlbr regonal n Iala, Il Mulno, Bologna. ZAMAGNI, Vera (99), Il valore agguno del seore erzaro alano nel 9, n Gudo M. REY (ed.), I con economc dell Iala.. Una sma del valore agguno per l 9, vol. I.II., Laerza, Rome-Bar, pp ZAMAGNI, Vera (99), The Economc sory of Ialy Recovery afer Declne, Clarendon Press, Oxford.