Luca Fornaro

Whether and how this virtuous cycle can be triggered in the EU is a first order issue. IMO, this is one of the most interesting research and policy questions of our times.

This amplification effect could also go in reverse. A 'pro-growth' fiscal reform could raise productivity growth, making public debt easier to sustain, in turn freeing fiscal space for even more pro-growth policies.

Martin Wolf and I have studied this amplification effect in a recent paper, and show that it may lead to a state of fiscal stagnation, characterized by a self-sustained vicious cycle of high debt, high fiscal distortions and low productivity growth. Italy may be an example of it.

If the drop in public investment has a strong negative impact on productivity growth, the future public debt to GDP ratio may end up raising. This will call for another round of fiscal adjustment through cuts in public investments, and so on.

Moreover, there may be an amplification effect at play. Imagine that a government cuts public investments to increase its surplus and stabilize its debt (pretty much what happened during the euro area sovereign debt crisis).

There is also evidence suggesting that taxes on investment in intangibles tend to slow down innovation and productivity growth.

While this evidence is preliminary, it thus does look like fiscal policy affects productivity growth.

On the empirical side, recent research suggests that public investments matter for productivity. In particular, these two brilliant papers show that higher spending in public R&D crowd in private investment and lead to higher productivity growth in the medium run.

My feeling is that this may be a big miss, and that integrating endogenous productivity dynamics in debt sustainability analyses could be an important area for future research.

Let me explain by citing a few recent works.

Are public debts in the European Union sustainable? This recent article is a great introduction to this topic, I learned a lot by reading it.

One thing that struck me is that debt sustainability analyses typically abstract from the impact of fiscal policy on productivity growth.

26th Jacques Polak Annual Research Conference: The Evolving Landscape of Global Trade and Financial Integration The 2025 IMF Annual Research Conference will bring together academics and policy makers, promote innovative research, and provide a platform for a fruitful exchange of views.

Also, I will be presenting this paper at the next IMF Jacques Polak conference imf.org/en/News/Semi.... The program looks great, and I look forward to it.

If you're interested, you can find the full paper here crei.cat/wp-content/u....
@mw_econ
and I are pretty new to the international trade literature, so comments are welcome.

Finally, what if a country puts a tariff on innovation inputs, perhaps by taxing researchers moving from abroad? This policy may fail spectacularly, by triggering an outflows of innovation goods, which over time will erode the country's technological rents.

Moreover, if the rest of the world chooses to retaliate, the result will be a full-blown trade war. In this scenario, tariffs have no impact on the distribution of technological rents across countries, but they cause big efficiency and output losses.

But this strategy has several drawbacks. First, reducing imports of foreign high-tech goods generates productivity and output losses. Second, even if import tariffs may increase national welfare, this comes at the expense of even larger welfare losses in the rest of the world.

Tariffs on imports of high-tech goods may be used to steal technological rents from the rest of the world. Intuitively, tariffs reduce the profitability of foreign high-tech firms, causing a flow of innovation inputs and technological rents to the country imposing the tariffs.

From a national perspective, importing innovation inputs yields technological rents, because of the positive knowledge spillovers that they create. So countries have an incentive to compete for technological hegemony, i.e. to become net importers of innovation inputs.

To innovate, high-tech firms need specialized 'innovation inputs', such as researchers and venture capital. Building a strong high-tech cluster requires importing innovation inputs from abroad. Think of foreign researchers working for Big Tech firms in the Silicon Valley.

We start from the observation that high-tech clusters generate technological rents for the countries hosting them. Not only high-tech firms are highly profitable, but their innovation activities trigger positive knowledge spillovers to other domestic firms.

We provide a framework connecting trade policies to innovation and technological hegemony. Our model focuses on high-tech firms that invest heavily in R&D and other intangibles. Nowadays, these firms play a key role in international trade.

How will tariffs affect innovation in the US and abroad? Shall the EU use tariffs to protect its high-tech industries? Should the rise in Chinese exports of high-tech goods worry the rest of the world?

We tackle these issues in a new paper on Tariffs and Technological Hegemony.

Some thoughts on the interactions between public debt, public investments and productivity growth in the euro area. Key risk is that the union ends up being split between a fiscally sound/high growth block and a fiscally stagnant one.

www.ecb.europa.eu/pub/pdf/sint...

Spain during the 2000s is a good example of these dynamics, but productivity growth slowdowns during large surges in trade deficits are quite common.

Is the EU heading towards a financial resource curse? Cheap imports (and capital flows) from China could crowd out economic activity in tradable industries in the EU, causing a productivity growth slowdown. crei.cat/wp-content/u...

Here you can find the full slides ecb.europa.eu/pub/pdf/sint..., while here is the recording of the panel ecb.europa.eu/press/confer..., which features great contributions by
@isabelschnabel.bsky.social, @agnesbq.bsky.social, @pietphc.bsky.social and @refetgurkaynak.bsky.social.

Deeply honored to have participated in a panel at the
@ecb.europa.eu Forum in Sintra. My remarks focused on the risk that high legacy debt may push part of the euro area into fiscal stagnation, and how a pro-growth approach to fiscal policy can mitigate this risk.

Luca Fornaro on Hysteresis, Endogenous Growth, and Aggregate Demand Policies Puntata podcast · Macro Musings with David Beckworth · 19/05/2025 · 1 h

This Macro-Musings episode 🔈
podcasts.apple.com/it/podcast/m...
featuring @lucafornaro.bsky.social provides extremely insightful and clear views on macroeconomic policies to counter hysteresis and stagnation 📈

YouTube video by Mercatus Center Luca Fornaro on Hysteresis, Endogenous Growth, and Aggregate Demand Policies

Enjoyed very much this podcast with MacroMusings and @lucafornaro.bsky.social about endogenous growth and aggregate demand policies.

youtu.be/B7aRTPgepok?...

Powerlifting through Hysteresis On strength lost, strength regained, and the scars that shape an economy.

What do powerlifting and economic hysteresis have in common? My latest newsletter explores this connection, building on @petercontibrown.bsky.social Conti-Brown's powerlifting journey and @lucafornaro.bsky.social's hysteresis research. macroeconomicpolicynexus.substack.com/p/let-it-fai...

New column by @lucafornaro.bsky.social and Martin Wolf cepr.org/voxeu/column...

Three graphs of the evolution of public debt, primary surplus, and productivity growth in Italy compared to other advanced economies. Public debt-to-GDP ratios have climbed to historic highs in most advanced economies. This column studies the connection between productivity growth, fiscal policy, and public debt. Using a theoretical model, it argues that a feedback loop is possible between fiscal policy and growth. Large primary surpluses are associated with fiscal distortions which depress investment and productivity growth, and lead to further pressure on public debt-to-GDP ratios. A fall into fiscal stagnation can result from hysteresis effects or pessimistic animal spirits. Meanwhile, exiting fiscal stagnation requires large policy interventions that reduce the public debt-to-GDP ratio, such as credible pro-growth strategies.

@lucafornaro.bsky.social & Martin Wolf argue that a feedback loop is possible between fiscal policy and #growth. Exiting fiscal stagnation requires large policy interventions that reduce public debt-to-GDP ratio, such as credible pro-growth strategies.
cepr.org/voxeu/column...
#EconSky