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Modelling Italian potential output and the output gap

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  • Antonio Bassanetti

    ()
    (Bank of Italy)

  • Michele Caivano

    ()
    (Bank of Italy)

  • Alberto Locarno

    ()
    (Bank of Italy)

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.

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Bibliographic Info

Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 771.

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Date of creation: Sep 2010
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Handle: RePEc:bdi:wptemi:td_771_10

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Related research

Keywords: potential output; business cycle; Phillips curve; output gap;

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Cited by:
  1. Fabio Busetti & Michele Caivano, 2013. "The trend-cycle decomposition of output and the Phillips curve: Bayesian estimates for Italy," Temi di discussione (Economic working papers) 941, Bank of Italy, Economic Research and International Relations Area.
  2. Michele Caivano & Lisa Rodano & Stefano Siviero, 2010. "The transmission of the global financial crisis to the Italian economy. A counterfactual analysis, 2008-2010," Questioni di Economia e Finanza (Occasional Papers) 64, Bank of Italy, Economic Research and International Relations Area.

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