Demand and supply shocks, persistence, and investment dynamics: evidence from the Italian economy

Understanding whether macroeconomic fluctuations reflect transitory or persistent shocks is central to both economic theory and economic policy. This paper provides new evidence on this distinction for the Italian economy, with a particular focus on investment. Using a Bayesian structural VAR that identifies demand and supply shocks and distinguishes between their permanent and transitory components, we show that the weakness in output and investment over the 2008-19 period was mainly attributable to persistent supply shocks, consistent with a deterioration in productive capacity. By contrast, the post-pandemic recovery was driven predominantly by demand factors, with limited evidence of persistent supply shocks. Extending the analysis to the sectoral level, we show that permanent supply shocks generate heterogeneous responses in industrial production, confidence, and capacity utilization, with larger and more persistent effects in more capital-intensive sectors and in sectors more exposed to financial frictions. The results highlight that being able to identify the nature and persistence of shocks is crucial for interpreting macroeconomic dynamics and informing economic policy.