Potential Output and Microeconomic Heterogeneity

Abstract

I estimate potential output growth using a production function approach applied to individual firm-level data for Italy. The dataset includes 360,000 non-financial corporations over the period 2004-15. I compare these estimates with those obtained from aggregate data, with a view to extracting additional information on the drivers of potential output in recent years. The approach based on individual firm-level data suggests a more sluggish potential growth before the crisis and a stronger recovery afterwards; the main reason is that estimates based on aggregate data are likely to suffer from aggregation biases and endogeneity problems. I find that the contributions of labour and capital to potential output growth decline over time and that unobserved firms’ productivity explains most of the recovery after 2009; turnover has a substantial negative impact during the crisis, but a positive one afterwards. All the main economic sectors are affected by the financial crisis; potential growth in manufacturing is less damaged during the crisis and recovers afterwards; the service sector is recovering slowly, while construction firms are still not recovering.

Keywords: potential output, heterogeneity, aggregation bias

JEL Classification: D24, E23