The Italian productivity slowdown in a Real Business Cycle perspective

Abstract

This paper investigates the structural relation between the italian weak macroeconomic performances and the productivity decline experienced over the last …fteen 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 con…rmed, since growth in the investmentgood sector relies on the counterbalancing properties of its transitory sector-speci…c 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 brie ‡y discussed. JEL classi…cation: E32, O41