The last fifteen years of stagnation in Italy: a business cycle accounting perspective

Abstract

In this paper, we investigate possible sources of declining economic growth in Italy beginning near the middle of the 1990s. A long-term data analysis suggests that the poor performance of the Italian economy cannot be blamed on an unfortunate business cycle contingency. Other countries of the euro area have shown better performance, and the macroeconomic data indicate that the Italian economy has not grown at the same rate as these other European economies. We investigate the sources of economic fluctuations in Italy by applying the business cycle accounting procedure introduced by Chari et al. (Econometrica 75(3):781–836, 2007). We analyze the relative importance of efficiency, labor, investment and government wedges for business cycles in Italy during the 1982–2008 period. We find that individual wedges have played different roles during this period; however, the efficiency wedge is shown to be the factor most responsible for the stagnation phase that began in approximately 1995. Our findings also show that the decline in labor market distortions that occurred in Italy during the 1990s alleviated the stagnation effect somewhat and prevented an even more abrupt slowdown in per capita output growth.