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Shock propagation and economic policies in the Italian production network

Author

Listed:
  • Fabio Bertolotti

    (Bank of Italy)

  • Andrea Linarello

    (Bank of Italy)

  • Patrick Zoi

    (Bank of Italy)

Abstract

We have developed a quantitative framework to study shock propagation in the Italian economy, building on Baqaee and Rubbo (2023) and extending it to include trade openness and endogenous labour supply. The model is calibrated using detailed input-output data for 98 sectors and macroeconomic aggregates. We illustrate the role of network linkages by comparing the effects of sectoral productivity shocks in a full network economy versus a counterfactual 'island' economy. In the former, shocks to upstream industries are significantly amplified while those to downstream industries are dampened, relative to the effects of the same shocks in the island economy. We then apply the model to four policy scenarios: an increase in R&D tax credits; a set of entry regulation reforms; a spike in the price of imported oil and gas inputs; and an assessment of the aggregate productivity gains from AI adoption. In all cases, network forces account for a substantial share of aggregate effects. The framework provides a flexible and data-consistent tool for evaluating policies with strong sectoral dimensions.

Suggested Citation

  • Fabio Bertolotti & Andrea Linarello & Patrick Zoi, 2026. "Shock propagation and economic policies in the Italian production network," Questioni di Economia e Finanza (Occasional Papers) 1020, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:opques:qef_1020_26
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    File URL: https://www.bancaditalia.it/pubblicazioni/qef/2026-1020/QEF_1020_26.pdf
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    JEL classification:

    • E01 - Macroeconomics and Monetary Economics - - General - - - Measurement and Data on National Income and Product Accounts and Wealth; Environmental Accounts

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