Gabriella Legrenzi

Lecturer in Economics

Biography

Gabriella Legrenzi holds a LLB in Law from the University of Milan, a MSc in Economics from Warwick University, an MA in Social Policy from Warwick University and a PhD in Economics from the Universities of Milan (joint programme of Bocconi, Cattolica and Statale).

Before joining Keele in 2005, she was a Research Fellow at the University of Cambridge. She is currently a visiting academic at the Department of Economics of University of Warwick.

Research Group: Centre for economic Research.

Research Interests: Fiscal policy, fiscal federalism, political economy, non-profit organisations

JEL Codes: C22; C32 E6; H1; H6,; H7.

Collaborators: John Bennett (Brunel), Elisabetta Iossa (Brunel), Costas Milas (Keele), Ruthira Naraidoo (Keele).

Research grants: 2001-2003 University of Milan grant for the analysis of government expenditure in the EU (principal investigator).

Conference participation: World Congress of the Public Choice Society, Amsterdam 2007; Public Economic Theory annual conference, Bejing 2004 (co-author presentation); International Institute of Public Finance Annual Conference, Bocconi, Milan, 2004; Royal Economic Society, annual conference, Swansea, April 2004 (co-author presentation); Seminar: "Financing and Managing Public Services", Oxford University, March 2003 (co-author presentation); North American Meeting of the Econometric Society, University of California, Los Angeles, June 2002; European Public Choice Society, Annual Meeting, Belgirate, April 2002;Society of Non-linear Dynamics and Econometrics Meeting, Federal Reserve Bank of Atlanta, March 2002; International Institute of Public Finance, annual meeting, Linz, August 2002.

Refereeing: Public Choice, ESRC, Applied Economics, Regional Studies, Oxford University Press.

Selected publications

Current working papers

Current Research

The Political Economy of Fiscal Policy

This is my primary field of research. Papers on the analysis of the displacement effect, the consideration of supply-side factors in the growth of governments, the introduction of non-linear dynamic analysis in economic policy are now published in Public Choice, International Tax and Public Finance (jointly with C. Milas), Public Finance Review (jointly with C. Milas), Applied Economics Letters (jointly with C. Milas), Studies in Non-Linear Dynamics and Econometrics (jointly with C. Milas) and Public Finance/Finances Publiques.

Current projects:

A: A Non-Linear Analysis of the Sustainability of the Government’s Intertemporal Budget Constraint: Some Empirical Evidence from the European Monetary Union Countries (with C.Milas).

Extended preliminary abstract: We test the respect of the restrictions arising by imposing a no-Ponzi games condition in the government’s intertemporal budget constraint, on time-series data for the EMU countries. Once established whether a country is on a sustainable fiscal path, we empirically model its fiscal authorities’ reaction function, with a non-linear error correction analysis. This allows us not only to verify the respect of the intertemporal budget constraint, but also to infer which fiscal variable carries the burden of fiscal consolidation, if the magnitude and speed of adjustment are the same whether we are above or below the equilibrium, and whether the response of fiscal policy variables is (non-linearly) conditioned by the state of the economy. Given the documented high risk associated to (non-linear) tax adjustments, against the potential non-Keynesian effects of spending cuts, it is surprising how the political debates focus so much on sustainability and so little on how the sustainability is achieved. Preliminary results for the case of Italy show that (i) the fiscal consolidation process is entirely assigned to the tax instrument, while government spending is exogenously determined by the political process, (ii) taxes are downward inflexible and adjust faster the larger the deviations from equilibrium, and (iii) taxes increase more during good phases of the economic cycle with respect to their decrease during bad phases.

B: The political economy determinants of fiscal adjustment.

We model and empirically test a non-linear reaction function of fiscal authorities to budgetary disequilibria, sensitive to political economy variables. This is made in order to understand whether the political system and/or the budgetary institutions play a role in deciding the pivotal variable in the processes of fiscal consolidation.

C: The interaction between fiscal and monetary policy when fiscal and monetary preferences are both asymmetric (joint with R. Naraidoo, Nottingham, and C.Milas, Keele).

We attempt to jointly model (non- linear) fiscal and monetary reaction functions, in a framework where decision-makers are allowed to weight differently positive and negative deviations from the targets.

D: The Openness of the Economy and the Growth of Governments.

I extend Rodrik’s (1998) model of openness and growth by introducing two different types of demand for publicly provided goods and services: i.e. welfare-driven and crisis-intervention. Our preliminary results for the case of Italy show that most of the positive impact of the openness of the economy on government size is in effect welfare-driven. Only in particular and well-defined periods of economic crisis, the above relationship does not hold, and government growth is mainly driven by crisis-intervention purposes.

The Role of Commercial Non-Profit Organisations in the Provision of Public Services

Non-profit organisations play a significant role in many market economies and recently have been the subject of much economic analysis and political interest. To pursue its mission the non-profit may supply the output at a loss (possibly setting a zero price), relying on donations for funding. In recent years, however, non-profits have become increasingly commercialised, for example undertaking additional activities unrelated to their mission. My research with Bennett and Iossa considers a new argument for commercialisation, which rests on the potential volatility of donations, particularly at the level of the individual organisation. If the profit on commercial activity is more certain than the income from donations, it may be advantageous for a non-profit to invest in creating capacity for commercial activity, even at the cost of less capacity investment in mission activity. Investment in commercial activity may be viewed as the purchase of a type of insurance. If a good state of the world obtains (donations being high), the forgone investment in mission activity will result in a binding mission capacity constraint, holding back mission output. However, if a bad state obtains (donations being low), the ability to supply commercial output limits the extent by which, because of budgetary considerations, the non-profit will have to reduce its supply of mission output. We find the conditions under which such investment behaviour is rational for a non-profit and then explore empirically whether this behaviour obtains in practice. One research paper focusing on the analysis of new commercial non-profits (Glas Cymru, Network Rail and NAV Canada) has now been published in the Oxford Review of Economic Policy. Short-term plans: I am currently revising two papers with Bennett and Iossa on the insurance function of commercial investment, which will be sent out to journals shortly.

Fiscal federalism

I focus on the analysis of the budgetary decisions of local governments and the incentives provided under different budgetary institutions. Some preliminary results, applied to the Italian municipalities, show that both under centralisation and decentralisation of tax-collection, local governments are provided incentives to raise their expenditure as a response to cuts in unconditional grants. Under these circumstances, the use of matching grant should be encouraged, as the local jurisdiction will internalise part of the cost of the project. Territorial redistribution could still be achieved by using different percentages of public/local financing. A preliminary version of this work has been published in the Proceedings of the 2002 North American Summer Meetings of the Econometric Society Volume 1: Urban and Public Economics, edited by David K. Levine, William Zame, Lawrence Ausubel, Roger Gordon, Therese McGuire and John Rust.

Medium-term plans: Build theoretical models of political bargaining between central and local jurisdictions, aimed at deriving efficient budgetary rules, to avoid excessive deficits and at the same time incentive investments. Test these theories on the US state governments.