The trend-cycle decomposition of output and the Phillips curve: Bayesian estimates for Italy

A standard model-based trend-cycle decomposition of Italian GDP yields a likelihood function that is relatively flat and has two local maxima. A Bayesian estimation of the model identifies output gap and trend components that match the features of the Italian business cycle well. In a bivariate output and Phillips curve model it is found that: (i) the median value of the semi-elasticity of prices to the output gap is 0.5 after 20 quarters, (ii) the inflation cycle lags GDP on average by about 3 quarters.