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The sovereign crisis and Italy’s potential output

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  • Gerali, Andrea
  • Locarno, Alberto
  • Notarpietro, Alessandro
  • Pisani, Massimiliano

Abstract

We evaluate the effects of the European sovereign crisis on Italian potential output (natural output, in the absence of nominal rigidities) by simulating a New Keynesian model. Our results are as follows. First, the 2011–2013 recession subtracted 1.6 percentage points from potential output growth and widened the output gap. Second, the 2013 reforms limited the reduction in output capacity to 1.4 points and enhanced long-run growth by 3. Third, once a balanced budget is achieved in the medium term, reductions in either labor or capital income taxes would boost potential output growth by 0.2 points per year.

Suggested Citation

  • Gerali, Andrea & Locarno, Alberto & Notarpietro, Alessandro & Pisani, Massimiliano, 2018. "The sovereign crisis and Italy’s potential output," Journal of Policy Modeling, Elsevier, vol. 40(2), pages 418-433.
  • Handle: RePEc:eee:jpolmo:v:40:y:2018:i:2:p:418-433
    DOI: 10.1016/j.jpolmod.2017.07.006
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    References listed on IDEAS

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    Keywords

    Sovereign risk; Fiscal policy; Potential output;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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