Essays on Applied Political Economy

This thesis was written as part of the PhD program in Economics and political economy at the University of Genoa. The recent global challenges generated by the pandemic crisis, a resurgence of widespread inflation, and an increasingly urgent demand for significant actions against climate change compel policymakers to consider tools and measures that require appropriate identification and counteraction strategies. Simultaneously, economic research is seeking to adopt new tools for identifying correlation and cause-and-effect relationships, the study of which is especially important in contexts where data are scarce or may result from inaccurate estimation. This becomes particularly complicated in cases such as hyperinflations. In this specific scenario, tools like wavelets (now widely used, especially in the financial sector) have found limited application, considering the economic history (Fratianni et al., 2021 being one of the few exceptions). On the other hand, evidence regarding the relationship between environmental pollutants and economic growth is not always consistent, making it challenging to identify a political impetus to reverse the climate trend and pollution. This dissertation aims to analyze, through the lens of political economy, these two themes: the relationship between the causes of inflation (chapter one) and redistributive consequences (chapter three), focusing on stabilization policies and the actual presence of a nonlinear relationship between economic growth and pollution in different income groups. It also aims to provide potential policy indications. We also aim to bring a case of great historical interest to show how some of these tools can be useful even in the context of an analysis with a relatively limited amount of data. The first chapter ("In der Welle des Preises mitschwimmen: a multichannel view of the Weimar hyperinflation) focuses on the study of the German hyperinflation of 1922-1923, framing it in a framework where multiple causes act simultaneously and emerge as determining factors of inflation. This challenges the notion of a singular triggering cause, showing that often, other causes were either considered minor or caused by the same factor. The fiscal or money views, that have emerged as the prevailing perspective, are two examples of this argument. Heterodox inflation and stabilization framework, despite introducing wages and considers inflation as caused by potentially difficult identifiable causes, considers wages as the main actor on the high and hyperinflation. These views have been challenged in this study, which contends that inflation is a multifaceted outcome influenced by numerous factors operating at different time and frequency and where it doesn't emerge as a main single cause. The study, moreover, extends beyond conventional analysis periods by constructing an original weekly dataset spanning from January 15, 1921, to December 29, 1923, incorporating the initial post-stabilization weeks. The interest in the build f a more extended dataset is useful since, as proposed by Mladenović and Petrovic(2010), hyperinflation dynamics could be misspecified if based on low frequency data. Due to the absence of real production data at the required frequency, nominal variables were predominantly used, limiting the application of traditional time series analysis tools that require stationarity. To address this challenge, wavelet tools are employed for spectral and correlation analysis, decomposition, and the examination of predictability. Moreover, causality is tested through multi spatial convergent cross mapping and transfer entropy. Applied findings indicated that German inflation exhibited long memory persistence, with limited predictability, particularly in the long term. Recurring behaviors at different scales were identified before transitions to new patterns, providing insights into the dynamic nature of inflationary phases. Causal analysis aimed to uncover relationships between nominal variables and the non-stationary component of inflation over different time scales. Wavelet coherence suggested potential wage-price spirals. The second paper(The EKC around the world: does the income group matter?) empirically analyzes the presence of the Environmental Kuznets Curve (EKC) in high, medium, and low-income countries. The EKC is currently a widely used tool in environmental political economy and consists of a non-linear relationship whose movement is linked to economic development stages. As countries tend to grow and enter advanced stages of development, they are more likely to seek measures to contain pollutants. The empirical analysis provides results that support that hypothesis. Across various specifications, the coefficients exhibit expected signs and high significance levels. The focus is on the parameters of interest determining the EKC shape. A pooled OLS without covariate control (a “naive” morel), a refinement with control variables and a time trend, fixed effects models and weighted estimations are applied. Furthermore, an examination of CO2 and methane emissions was conducted. The findings indicate that the results for CO2 align with the previously discussed results, indicating a consistent pattern while methane findings, though qualitative, lack robustness. Focusing on income groups, strongly support the EKC for middle-income countries. Low-income countries show a monotonically increasing relationship, consistent with early EKC stages. High-income countries, with a time trend, align with the EKC. These results contribute insights into the complex interplay between economic development and environmental sustainability, acknowledging the importance of income levels and country-specific dynamics in shaping environmental outcomes. The third paper (Stop and go…and stop: inflation, political exchange and failed stabilization in post-convertibility Argentina, with Nicolas Blampied) studies Argentine inflation between 2004 and 2019 using the lens of political economy. This approach makes it possible to identify inflation as an effective target of certain social classes at the expense of holders of financial assets not indexed to it. This study extends the political exchange hypothesis proposed by Beetsma and Van der Ploeg (1996) to analyze inflation dynamics in post-convertibility Argentina, with a specific focus on the political equilibriums that have shaped the country since the early 2000s. The model incorporates three interest groups—businesspeople, rentiers, and workers—articulating their preferences regarding inflation, while political parties compete for government representation by aligning with these demands. In the aftermath of Argentina's 2001-2002 macroeconomic crisis, two distinct political equilibriums emerged, each associated with varying inflation rates. From 2003 to 2015, the Kirchner administration, a businessperson-worker coalition, favored workers and businesspeople but imposed an increasing inflationary tax on rentiers. In 2015, a shift to a businessperson-rentier coalition (Macri's administration) aimed at reducing inflation, favoring rentiers with high real interest rates and businesspeople with tax cuts. The unexpected strength of workers' lobbying power led to a failed stabilization and a subsequent return to power of a businessperson-worker coalition in 2019. In an era where inflation is regaining dominance in debates, both regarding its nature and methods to prevent further price increases, this contribution asserts that inflation can be used as a means of redistribution in situations where financial wealth is polarized. Furthermore, a developed financial system could mitigate this incentive by providing instruments to protect against inflation. For future stabilization programs, coordination is crucial to ensure the fair distribution of benefits and potential costs among interest groups within the governing coalition, thereby minimizing the risk of coalition dissolution.