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The Estimation of Potential Output for Italy: an Enhanced Methodology

digital The Estimation of Potential Output for Italy: an Enhanced
Methodology
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


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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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.