Modelling Italian Potential Output and the Output Gap

Government of the Italian Republic (Italy), Ministry of Economy and Finance, Department of the Treasury Working Paper No. 7

51 Pages Posted: 22 Aug 2013

Multiple version iconThere are 2 versions of this paper

Date Written: August 20, 2013

Abstract

The aim of the paper is to estimate a reliable quarterly time-series of potential output for the Italian economy, exploiting four alternative approaches: a Bayesian unobserved component method, a univariate time-varying autoregressive model, a production function approach and a structural VAR. Based on a wide range of evaluation criteria, all methods generate output gaps that accurately describe the Italian business cycle over the past three decades. All output gap measures are subject to non-negligible revisions when new data become available. Nonetheless they still prove to be informative about the current cyclical phase and, unlike the evidence reported in most of the literature, helpful at predicting inflation compared with simple benchmarks. We assess also the performance of output gap estimates obtained by combining the four original indicators, using either equal weights or Bayesian averaging, showing that the resulting measures (i) are less sensitive to revisions; (ii) are at least as good as the originals at tracking business cycle fluctuations; (iii) are more accurate as inflation predictors.

Keywords: E37, C52

JEL Classification: potential output, business cycle, Phillips curve, output gap

Suggested Citation

Bassanetti, Antonio and Caivano, Michele and Locarno, Alberto, Modelling Italian Potential Output and the Output Gap (August 20, 2013). Government of the Italian Republic (Italy), Ministry of Economy and Finance, Department of the Treasury Working Paper No. 7. Available at SSRN: https://ssrn.com/abstract=2314268 or http://dx.doi.org/10.2139/ssrn.2314268

Antonio Bassanetti (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Michele Caivano

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Alberto Locarno

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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