The Italian Productivity Slowdown in a Real Business Cycle Perspective

This paper investigates the structural relation between the italian weak macroeconomic performances and the productivity decline experienced over the last fifteen years, estimating a Dynamic Stochastic General Equilibrium (DSGE) model. Modifying Ireland and Schuh's (2008) two-sector RBC model in order to account for cointegration between consumption and investment, we interpret the unsatisfactory italian economic dynamics in light of a permanent negative shock to the component of productivity which is common across the consumption-good and the investment-good sector. In light of our results, the common view that the italian productivity problems involve only the Made in Italy sectors is only partially confirmed, since growth in the investment-good sector relies on the counterbalancing properties of its transitory sector-specific productivity component. Moreover, the model indirectly stresses the importance of the intermediate-good productions in the observed productivity decline. The short and long-run implications of productivity dynamics for the consumption, investment and hours worked are also briefly discussed