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The sovereign crisis and Italy’s potential output

Andrea Gerali (), Alberto Locarno, Alessandro Notarpietro () and Massimiliano Pisani ()

Journal of Policy Modeling, 2018, vol. 40, issue 2, 418-433

Abstract: We evaluate the effects of the European sovereign crisis on Italian potential output (natural output, in the absence of nominal rigidities) by simulating a New Keynesian model. Our results are as follows. First, the 2011–2013 recession subtracted 1.6 percentage points from potential output growth and widened the output gap. Second, the 2013 reforms limited the reduction in output capacity to 1.4 points and enhanced long-run growth by 3. Third, once a balanced budget is achieved in the medium term, reductions in either labor or capital income taxes would boost potential output growth by 0.2 points per year.

Keywords: Sovereign risk; Fiscal policy; Potential output (search for similar items in EconPapers)
JEL-codes: E32 E62 (search for similar items in EconPapers)
Date: 2018
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