The Estimation of Potential Output for Italy: an Enhanced Methodology

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Article

journal	RIVISTA INTERNAZIONALE DI SCIENZE SOCIALI
issue	RIVISTA INTERNAZIONALE DI SCIENZE SOCIALI - 2017 - 4
title	The Estimation of Potential Output for Italy: an Enhanced Methodology
authors	Marco Cacciotti Riccardo Conti Roberto Morea Serena Teobaldo
publisher	Vita e Pensiero
format	Article \| Pdf
online since	04-2018
doi	10.26350/000518_000002
issn	0035-676X (print) \| 1827-7918 (digital)

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Description
In this paper, we identify some of the key sources of underestimation of Italy’s potential growth within the EU commonly agreed methodology for the calculation of output gaps and potential ouptut and we make two country-specific proposals to resolve or mitigate those empirical issues. Such changes concern: 1) the ‘‘statistically optimal’’ calibration of the variances of the innovation processes of the NAWRU model through a Grid Search tool that we developed; 2) the estimation of the TFP cycle via the introduction of a labour hoarding index. We show that small adjustments would significantly improve the realism of potential growth estimates and yield a wider output gap, with a slower pace of closure. Such alternative estimates would have a substantial impact on the compliance of Italian public finances with the requirements of the Stability and Growth Pact. keywords potential output, output gap, NAWRU, grid search, capacity utilization, TFP.

Description

In this paper, we identify some of the key sources of underestimation of Italy’s potential growth within the EU commonly agreed methodology for the calculation of output gaps and potential ouptut and we make two country-specific proposals to resolve or mitigate those empirical issues. Such changes concern: 1) the ‘‘statistically optimal’’ calibration of the variances of the innovation processes of the NAWRU model through a Grid Search tool that we developed; 2) the estimation of the TFP cycle via the introduction of a labour hoarding index. We show that small adjustments would significantly improve the realism of potential growth estimates and yield a wider output gap, with a slower pace of closure. Such alternative estimates would have a substantial impact on the compliance of Italian public finances with the requirements of the Stability and Growth Pact.