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Business & Economics

Responses of Real Output to Changes in Euro Exchange Rates, Stock Prices, and other Macroeconomic Conditions in Italy
Bruno S. Sergi, Yu Hsing

ABSTRACT. Applying a simultaneous equation model including the monetary policy reaction function and uncovered interest parity, this paper finds that the expected real exchange rate and real output in Italy exhibit an inverted J-curve relationship, suggesting that expected real depreciation raises real output during 1999.Q3-2001.Q4 whereas expected real appreciation increases real output during 2002.Q1-2008.Q3. Hence, any expected real depreciation of the euro in the future would not help increase real output. Other findings are that a higher real stock price, a higher EU real interest rate, and a lower expected inflation rate would increase real output and that the coefficient of the ratio of government deficit to GDP is positive but insignificant. Thus, fiscal prudence would be needed in considering deficit-financed spending to stimulate the economy.

KEYWORDS: international trade, economic conditions, exchange rates, stock markets, interest rates, inflation, Italy.

JEL classification: F31, F41, E52.