Modelling italian potential output and the output gap

Antonio Bassanetti, Michele Caivano and Alberto Locarno ()

No 7, Working Papers from Department of the Treasury, Ministry of the Economy and of Finance

Abstract: The aim of the paper is to estimate a reliable quarterly time-series of potential output for the Italian economy,exploiting four alternative approaches: a Bayesian unobserved component method, a univariate time-varying autoregressive model, a production function approach and a structural VAR. Based on a wide range of evaluation criteria, all methods generate output gaps that accurately describe the Italian business cycle over the past three decades. All output gap measures are subject to non-negligible revisions when new data become available. Nonetheless they still prove to be informative about the current cyclical phase and, unlike the evidence reported in most of the literature, helpful at predicting inflation compared with simple benchmarks. We assess also the performance of output gap estimates obtained by combining the four original indicators, using either equal weights or Bayesian averaging, showing that the resulting measures (i) are less sensitive to revisions; (ii) are at least as good as the originals at tracking business cycle fluctuations; (iii) are more accurate as inflation predictors.

Keywords: Potential output; business cycle; Phillips curve; output gap (search for similar items in EconPapers)
JEL-codes: C52 E37 (search for similar items in EconPapers)
Pages: 50
Date: 2013-08
New Economics Papers: this item is included in nep-eff and nep-mac
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Related works:
Working Paper: Modelling Italian potential output and the output gap (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:itt:wpaper:2013-7

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