Michele Fratianni

Taught in the Department of Business Economics and Public Policy at the Kelley School of Business of Indiana University in

Areas of Expertise

Monetary Economics, International Economics, International Finance, Economic History

Academic Degrees

• BA , Ohio State University, 1967
• MA, Ohio State University, 1967
• PhD, Ohio State University, 1971

Professional Experience

• 2006-present: Professor of Economics of the Universita'' Politecnica delle Marche, Ancona, Italy
• 1981-82: Senior Staff Economist, President''s Council of Economic Advisers.
• 1976-79: Economic Advisor, Commission of the European Communities, Brussels.
• 1973-1991 Visiting Professor of Economics, Katholieke Universiteit te Leuven, Belgium
• 1995 :Allis-Chalmers Distinguished Professor of International Economics, Marquette University, Milwaukee.
• 1995: Bundesbank Professor of International Monetary Economics, Free University of Berlin.

Awards, Honors & Certificates

• 2005: Honorary Citizenship of Ferrazzano, Italy.
• 1998-2006: W. George Pinnell Professor of Business Economics and Public Policy
• 1982: Ufficiale della Repubblica italiana.
• 1982: Gold Medal of the Pio Manzú Center
• 1991: Scanno Prize in Economics.
• 1992: St. Vincent Prize in Economics.

Selected Publications

• Fratianni, M., Marchionne, F. (2012), Trade Costs and Economic Development, Economic Geography, 88(2):137–163. DOI: 10.1111/j.1944-8287.2012.01145.x
• Michele Fratianni (2011), "Riflessioni Sulla Politica Economica Italiana in Occasione Del 150esimo Anniversario Dell''Unità", Economia Italiana, 2011(3): 645-675.
• Fratianni, Michele, Francesco Marchionne and Chang Hoon Oh (2011), "A Commentary on the Gravity Equation in International Business," Multinational Business Review, Vol. 19, No. 1, pp. 36-46.

Abstract Purpose – This commentary aims to discuss methodological issues and practical concerns of international business scholars who apply the gravity equation in their research.Design/methodology/approach – The paper summarizes and compares theories and several advanced empirical specifications in the gravity equation.Findings – The paper proposes a relatively low-cost specification and estimation to implement such correction, which is robust in the presence of various endogeneity effects and non-stationary variables. In the presence of zero-values in the dataset, however, the multilateral specification is best estimated with a Poisson maximum likelihood.Originality/value – The most important message of the commentary is that this equation should correct for multilateral resistance factors.

• Fratianni, Michele and Francesco Marchionne (2010), "The Banking Bailout of the Subprime Crisis: Size and Effects," PSL Quarterly Review, Vol. 63, No. 254, pp. 187-233.

Abstract This paper examines government policies aimed at rescuing banks from the effects of the great financial crisis of 2007-2009. To delimit the scope of the analysis, we concentrate on the fiscal side of interventions and ignore, by design, the monetary policy reaction to the crisis. The policy response to the subprime crisis started in earnest after Lehman''s failure in mid September 2008, accelerated after February 2009, and has become very large by September 2009. Governments have relied on a portfolio of intervention tools, but the biggest commitments and outlays have been in the form of debt and asset guarantees, while purchases of bad assets have been very limited. We employ event study methodology to estimate the benefits of government interventions on banks and their shareholders. Announcements directed at the banking system as a whole (general) and at specific banks (specific) were priced by the markets as cumulative abnormal rates of return over the selected window periods. General announcements tend to be associated with positive cumulative abnormal returns and specific announcements with negative ones. General announcements exert cross-area spillovers but are perceived by the home-country banks as subsidies boosting the competitive advantage of foreign banks. Specific announcements exert spillovers on other banks. Our results are also sensitive to the information environment. Specific announcements tend to exert a positive impact on rates of return in the pre-crisis sub-period, when announcements are few and markets have relative confidence in the "normal" information flow. The opposite takes place in the turbulent crisis sub-period when announcements are the order of the day and markets mistrust the "normal" information flow. These results appear consistent with the observed reluctance of individual institutions to come forth with requests for public assistance.

• Fratianni, Michele (2010), "Sviluppo, Rischio e Conti Con L’esterno Delle Regioni Italiane: Commenti e Riflessioni," Economia Italiana, No. 3.
• Fratianni, Michele and Francesco Marchionne (2010), "Banks’ Great Bailout of 2008-2009," Banks and Bank Systems, Vol. 5, No. 2, pp. 4-19.

Abstract This paper examines government policies aimed at rescuing banks from the effects of the financial crisis of 2007-2009.To delimit the scope of the analysis, we concentrate on the fiscal side of interventions and ignore, by design, the monetary policy reaction to the crisis. The policy response to the subprime crisis started in earnest after Lehman’s failure in mid September 2008, accelerated after February 2009, and has become very large by September 2009.Governments have relied on a portfolio of intervention tools, but the biggest commitments and outlays have been in theform of debt and asset guarantees, while purchases of bad assets have been very limited. We employ event studymethodology to estimate the effects of government interventions on banks and their shareholders. Announcements directed at the banking system as a whole (general) and at specific banks (specific) were priced by the markets as cumulative abnormal rates of return over the selected window periods. General announcements tend to be associated with positive cumulative abnormal returns and specific announcements with negative ones. Our results are also sensitive to the information environment. Specific announcements tend to exert a positive impact on rates of return in the pre-crisis sub-period, when announcements are few and markets have relative confidence in the “normal” information flow. The opposite takes place in the turbulent crisis sub-period when announcements are frequent and markets mistrust the “normal” information flow. These results appear consistent with the observed reluctance of individual institutions to come forth with requests for public assistance.

• Chang Hoon Oh and Michele U. Fratianni.  "Do Additional Bilateral Investment Treaties Boost Foreign Direct Investments?, " Working Papers 2010-04, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.

Abstract This paper finds that the stock of bilateral investment treaties (BIT) is subject to diminishing returns measured in terms of foreign direct investment flows. Diminishing returns are more pronounced among country-pairs that have not signed bilateral investment treaties but have their own BIT network than among country-pairs with their own bilateral investment treaties. For a given country''s BIT network, a multinational enterprise finds more value in investing where a bilateral treaty is in place. This may suggest either stronger property-rights protection or greater latitude to use the host country as an export platform. Our subsidiary finding is that an index of a country''s BIT network diversity appears to be a plausible explanation of the limiting force underlying the diminishing returns of the stock of BITs in a world where there is a mix between horizontally and vertically integrated multinational enterprises.

• Alessandra Del Boca,  Michele Fratianni, Franco Spinelli, and Carmine Trecroci, "The Phillips Curve and the Italian Lira, 1861-1998", North American Journal of Economics and Finance, 2010, 21(2): 182-197.

Abstract We examine Italian inflation rates and the Phillips curve with a very long-run perspective, one that covers the entire existence of the Italian lira from political unification (1861) to the entry of Italy in the European Monetary Union (end of 1998). We first study the volatility, persistence and stationarity of the Italian inflation rate over the long run and across various exchange-rate regimes that have shaped Italian monetary history.  Next, we estimate alternative Phillips equations and investigate the extent to which nonlinearities, asymmetries and structural changes characterize the inflation-output trade-off in the long run. We capture the effects of structural changes and asymmetries on the estimated parameters of the inflation-output trade-off relying partly on sub-sample estimates and partly on time-varying parameters estimated with the Kalman filter. Finally, we investigate causal relationships between inflation rates and output and extend the analysis to include the US and the UK for comparison purposes. The inference is that Italy has experienced a conventional inflation-output trade-off only during times of low inflation and stable aggregate supply.

• Michele U. Fratianni, "The Gravity Equation in International Trade", in Alan M. Rugman (ed.), Oxford Handbook of International Business, Second Edition, Oxford University Press, 2009: 72-89.

Abstract This chapter offers a selective survey of the gravity equation (GE) in international trade. This equation started in the Sixties as a purely empirical proposition to explain bilateral trade flows, without little or no theoretical underpinnings. At the end of the Seventies, the GE was “legitimized” by a series of theoretical articles that demonstrated that the basic GE form was consistent with various models of trade flows. Empirical applications of GE expanded to cover a variety of issues, such as the impact of regional trade agreements, national borders and currency unions on trade, as well as the use of the equation to sort out the relative merit of alternative trade theories. A new wave of studies is now concentrating on the general equilibrium properties of the GE and finer econometrics points. The renewed interest of the academic profession in the development of the GE is undoubtedly driven by the equation’s empirical success.

• Michele U. Fratianni and Chang Hoon Oh, "Expanding RTAs, Trade Flows, and the Multinational Enterprise", Journal of International Business Studies, 2009, 40(7):1207-1227.

Abstract We test the relationship between the size of regional trade agreements (RTA) and openness by using a gravity equation with multilateral trade factors. Our sample includes eleven RTAs, seven with constant membership and four with expanding membership. Regional trade bias declines with the size of the club; three of the four expanding RTAs have already surpassed their ‘optimal’ size. We also explore the link between openness of the RTA and the geographic strategy of the multinational enterprise. We find strong evidence in favor of the regionalization strategy, which has been enhanced by the presence of RTAs.

• Michele U. Fratianni and Francesco Marchionne, "The Role of Banks in the Subprime Financial Crisis", Review of Economic Conditions in Italy, 2009 (1):19-59.

Abstract The ultimate point of origin of the great financial crisis of 2007-2009 can be traced back to an extremely indebted US economy. The collapse of the real estate market in 2006 was the close point of origin of the crisis. The failure rates of subprime mortgages were the first symptom of a credit boom tuned to bust and of a real estate shock. But large default rates on subprime mortgages cannot account for the severity of the crisis. Rather, low-quality mortgages acted as an accelerant to the fire that spread through the entire financial system. The latter had become fragile as a result of several factors that are unique to this crisis: the transfer of assets from the balance sheets of banks to the markets, the creation of complex and opaque assets, the failure of ratings agencies to properly assess the risk of such assets, and the application of fair value accounting. To these novel factors, one must add the now standard failure of regulators and supervisors in spotting and correcting the emerging weaknesses. Accounting data fail to reveal the full extent of the financial maelstrom. Ironically, according to these data, US banks appear to be still adequately capitalized. Yet, bank undercapitalization is the biggest stumbling block to a resolution of the financial crisis.

• Pietro Alessandrini and Michele U. Fratianni, "Resurrecting Keynes to Stabilize the International Monetary System", Open Economies Review, 2009, 20(3): 339-358.

Abstract We adapt the basic principles of the Keynes Plan and argue for the creation of a supranational bank money (SBM) that would coexist along side national currencies and for the establishment of a new international clearing union (NICU). These principles remain timely because the fundamental causes of the instability of the international monetary system are as valid today as they were in the early forties. The new  supranational money would be created against domestic earning assets of the Fed and the ECB and its quantity would be demand-driven. Our proposal is not an agreement on exchange rates, which while  possible is not essential to the functioning of the SBM. NICU would not hold open positions in assets denominated in national currency and consequently would not bear exchange rate risk. NICU would be more than an office  recording credit and debit entries of the supranational bank money. The financial tsunami that hit the world economy in 2007-2008 provides a unique opportunity for a coordinated strategy.

• Michele Fratianni and Chang Hoon Oh, "Size of Regional Trade Agreements and Regional Trade Bias", Applied Economics Letters, 2009, 16(6):1603-1606.

Abstract We test the relationship between size of regional trade agreement (RTA) and regional trade bias using a gravity equation on a large sample of 143 countries for the period 1980-2003. We find that regional trade bias declines with the size of the club and that three of the four expanding RTAs have already surpassed their ‘optimal’ sizes. There is no evidence that RTAs have set protection levels against outsiders non-cooperatively.

• Pietro Alessandrini and Michele U. Fratianni, "Dominant Monies, Special Drawing Rights, and Supranantional Bank Money," World Economics, 2009, Vol. 10, N. 4: 45-67.

Abstract The current international monetary system (IMS) is fragile because the dollar standard is rapidly deteriorating. The dual role the dollar as the dominant international money and national money cannot be easily reconciled because the US monetary authorities face a conflict between pursuing domestic objectives of employment and  inflation  and maintaining the international public good of a stable money. To strengthen the IMS, China has advocated  the revitalization of the Special Drawing Rights (SDRs). But SDRs are neither money nor a claim on any international institution; are issued exogenously without any consideration for countries’ external imbalances; and can activate international monies only though bilateral transactions. The historical record of SDRs as international reserves is altogether unimpressive. We propose instead the creation of a supernational bank money (SBM) within the institutional setting of a clearing union. This union would be a full-fledged agreement by participating central banks on specific rules of the game, such as size and duration of overdrafts, designation of countries that would have to bear the burden of external adjustment, and  coordination of monetary policies objectives and at expense of the maintenance of the international public good.

• Pietro Alessandrini, Michele U. Fratianni, and Alberto Zazzaro (2009), The Changing Geography of Banking and Finance, Springer, New York, NY.

Abstract The volume contains a set of original articles on the general theme of  The Changing Geography of Banking and Finance.

• Michele U. Fratianni, "Financial Crises, Safety Nets, and Regulation", Rivista Italiana degli Economisti, 2008, XIII (2): 169-207.

Abstract The historical record shows that financial crises are far from being a rare a phenomenon; they occur often enough to be considered part of the workings of finance capitalism.  While there is no single hypothesis that can best explain all crises, the implications of the credit boom-and-bust hypothesis, supplemented with asymmetric information, are consistent with the onset and development of many crises, including the current subprime crisis. Governments have reacted to crises by erecting a vast and growing safety net. In turn, to minimize their risk exposure, they have also put in place expansive systems of regulation and supervision.  The unwinding of the current crisis will mark a big enlargement of the safety net and moral hazard, as well as a predictable flurry of  policy proposals aimed at closing  past regulatory loopholes. The maintained hypothesis is that regulatory and market failures are inexorably intertwined.

• Michele Fratianni and Francesco Marchionne, "Heterogeneity of Trade Costs", Economics Bulletin, 2008, Vol.6, number 48:1-14.

Abstract In this paper, we test the hypothesis that higher economic development is associated with lower trade costs. Using exports from 103 Italian provinces to 188 countries over the period 1995-2004, we estimate distance elasticity, our measure of trade costs, through a gravity equation model of bilateral trade derived by Anderson and van Wincoop (2003). We use different methods to control for multilateral resistance. Results corroborate our hypothesis. We find that heterogeneity of trade costs in Italian provinces is high and that it is negatively associated with economic development.

• Michele U. Fratianni, John Kirton, and Paolo Savona (eds.), Corporate, Public and Global Governance: The G8 Contribution. Ashgate, 2007.
• Fratianni, Michele U., John Kirton and Paolo Savona (eds.), Financing Development: The G8 and UN Contribution. Ashgate, 2007. 
• Fratianni Michele U. (2007), Karl Brunner visto da Michele Fratianni. LUISS University Press.

Abstract Karl Brunner (1916-1989) was, with Milton Friedman and Allan Meltzer, the leader of the monetarist revolution of the Sixties and the Seventies. His work on asset markets placed the credit market, along with the money market, at center stage and focused on monetary policy as a primary source of instability. With Allan Meltzer he challenged the validity of the Keynesian paradigm and proposed an alternative model of the economy where the transmission of monetary impulses to the economy did not depend exclusively on the interest sensitivity of the demand for money but on the relative interest elasticities of the asset markets as well on variations in wealth. An unexpected feature of the alternative model is that fiscal policy determines the price level. Brunner had a strong foundation in methodology and was an adherent of the empirical philosophy school. In addition to asset markets and macroeconomics, Krunner wrote extensively on the nature of man, the role of markets and institutions. Finally, Brunner launched and managed the Journal of Money, Credit and Banking , the Journal of Monetary Economics, the Konstanzer Seminar on Monetary Theory and Monetary Policy, the Interlaken Conference on Analysis and Ideology, the Carnegie-Rochester Conference Series on Public Policy, and the Shadow Open Market Committee (the last two with Allan Meltzer).

• Fratianni, Michele U. (ed.), Regional Economic Integration, Elsevier, 2006.

Abstract This edited volume bravely and successfully tackles a number of issues of critical importance to international business scholars.  Each of the distinguished authors brings a fresh and rigorous approach to the impact of regional integration on distance costs; and to our understanding of the geography and performance of MNEs.  I particularly appreciated the chapters on the interaction between terrorism, trade and fdi flows.  This is an under-researched area, and the editor and his colleagues are to be congratulated on making a valuable contribution to this topic. John DunningEmeritus Professor of International Business at the University of Reading, U.K., and State of New Jersey Emeritus Professor of International Business at Rutgers University, New Jersey, U.S.A. 

• Fratianni Michele U. (2006), "Government Debt, Reputation and Creditors’ Protections: The Tale of San Giorgio," Review of Finance, 2006, Vol. 10 (4): 487-506.

Abstract San Giorgio (1407-1805) was a formal association aimed at protecting creditors’ rights and reducing the risk of debt repudiation by the Republic of Genoa. The behavior of this institution is broadly consistent with debt models that predict lending if lenders can impose big penalties on debtors, and models in which lenders can differentiate between excusable and inexcusable defaults. San Giorgio shareholders enjoyed low credit risk but also lower returns on capital than those prevailing on comparable foreign assets for which creditors’ protection mechanisms were lacking. The Republic’s quid pro quo was a low cost of financing. Differences in credit risk were an important explanation of differences in long-term interest rates across countries in 16th and 17th century Europe, a point not sufficiently emphasized by the literature.

• Fratianni, Michele U. and Franco Spinelli, "Italian City-States and Financial Evolution", European Review of Economic History, 2006, Vol.10, 3: 257-278. 

Abstract The term financial revolution has been abused in the literature. Revolution connotes a sharp and unique break from the past that should stand up to careful historical scrutiny, but in fact it does not. Evolution describes financial history better than revolutions. We compare the classic  “financial  revolutions” with the financial innovations of Genoa, Venice and Florence in the Quattrocento and  Cinquecento and the upshot is that these Italian city-states –the two maritime cities more than Florence -- had developed many of the features that were to be found later on in the Netherlands, England and the United States. The importance of  the early financial innovators has been eclipsed by the fact that these city-states did not survive politically. Instead, the innovations were absorbed in the long chain of financial evolution and, in the process, lost the identity of their creators.

• Kang, Heejoon and Michele U. Fratianni (2006), “Heterogeneous Distance-Elasticities in Trade Gravity Models,” Economics Letters, 90, 2006, pp. 68-71.

Abstract We show that statistically and economically significant heterogeneity exists in the distance elasticity in trade gravity models. Distance elasticities critically depend on whether trading partners belong to the OECD and whether they are Christian or Islam countries. 

• Fratianni, Michele U., and Heejoon Kang (2006), "International Trade, OECD Membership, and Religion," Open Economies Review, Vol. 17 (4-5): 493-508.

Abstract Transaction costs in trade gravity equation are proxied by the distance that separates two trading partners, under the assumption that the distance elasticity is the same across all trading partners. We show that distance elasticity, however, critically depends on whether trading partners are industrial countries (i.e., members of the OECD) or share same religion. These heterogeneities are both statistically and economically significant. For instance, expected trade flows are the largest when an OECD member trades with a non-member and both are non-religious. Expected trade flows fall as much as by 62.9% between two non-religious, non-OECD members. Expected bilateral trade drops by 48.1% when both countries in the pair are OECD members while one is Christian and the other is Islamic. Both religion and OECD membership significantly affect the typical transaction costs implied by the gravity equation.