The Estimation of Potential Output for Italy: an Enhanced Methodology

Name: The Estimation of Potential Output for Italy: an Enhanced Methodology
Brand: Vita e Pensiero
Availability: OnlineOnly

digital

Article

Magazine

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

Pages

Online from

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.