Frederico Bassi

Nationality Italian
Year of selection2017
InstitutionUniversité Paris 13 - Paris Nord, France
CountryFrance
RiskSocio-economic risks

Type of support

Post-Doctoral Fellowship

Granted amount

119 025 €

Duration

2 years

The financial crisis that burst in 2007-2008 left permanent traces in most OECD countries. The fact

that such transitory shocks can durably affect the GDP of a country calls into question the way

recovery strategies are traditionally tackled. Indeed, economic policies are based on models that

tend to assume dynamic stability and ignore sunk costs. More specifically, central banks and

financial institutions currently use calculations that ignore the possibility of strong persistent

damage to the productive potential of an economy, what is commonly called potential output.

« Misinterpretation of the economic phenomena can mislead policy makers into thinking they

should implement austerity measures, for instance, when really they shouldn’t », says Dr. Federico

Bassi to press the importance of an alternative approach. His post-doctoral project aims thereby at

creating a new method to measure the potential output of an economy, one which takes into account

these large potential output losses. The second part of his research consists in designing a

theoretical model allowing him to test the impact of various monetary, fiscal and financial markets’

regulatory policies on economic stability when permanent potential output losses are explicitly

taken into account.

« The risk of a secular stagnation in Europe, characterized by low rates of growth, high rates of

unemployment, growing inequalities and permanent losses of productive capacity, rises two main

challenges », explains Dr. Federico Bassi. « First, an accurate analysis of the sources and

consequences of this Great Recession and its systemic nature; second, the design of appropriate and

successful fiscal, monetary and structural policies, particularly as regards to banks’ and financial

institutions’ regulation ». The present project aims to take on these challenges by reevaluating the

architecture of the models currently used by policy makers, particularly in regard to their

calculation of potential output, a core concept of economic policy. To convey the importance of

getting this measure right, the researcher explains: « The output gap is the gap between potential

and actual output. Getting an accurate measure of potential output is fundamental, since the output

gap is among the most important indicators for policy makers: a negative output gap triggers

restrictive monetary policies in order to slow down the economy and avoid inflationary pressures; a

positive gap triggers expansionary monetary policies in order to accelerate the economy and avoid

deflationary pressures ».

Avoiding misinterpretation of economic phenomena

« I believe that the better way to reduce the risk of misinterpreting economic phenomena is not

having a unique, good model but rather a variety of models, built on different assumptions, in order

to compare the different results and be able to select the model that fits better with the current

historical context », continues Bassi. He uses the example of Italy which has lost 20 % of its

productive capacity since the financial crisis and where a lot of businesses have closed. « How can

we design effective recovery policies if we take for granted that these businesses are going to

reopen? We’re designing a method that is more flexible and that doesn’t assume that. » Once this is

done, him and his team will move on to designing a new macro-economic model to try and simulate

various policies.

Theoretical models are crucial tools in assessing complex phenomena and in trying to mitigate their

adverse impacts. That is if they reflect reality faithfully… This project develops along this main

concern. Recognising that « the existence of permanent effects after transitory shocks seems to be

the norm rather than the exception », Bassi’s project naturally aims to adapt current methods to this

newly recognised phenomena, broadening the spectre of how economic recovery is presently

approached. At a time when economists are in need of better understanding the effects of different

stabilisation policies and the effects of institutions on the business cycle, his findings hold great

potential for highly-needed insight.