Shock propagation and economic policies in the Italian production network

Fabio Bertolotti (), Andrea Linarello () and Patrick Zoi ()
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Fabio Bertolotti: Bank of Italy
Andrea Linarello: Bank of Italy
Patrick Zoi: Bank of Italy

No 1020, Questioni di Economia e Finanza (Occasional Papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: We have developed a quantitative framework to study shock propagation in the Italian economy, building on Baqaee and Rubbo (2023) and extending it to include trade openness and endogenous labour supply. The model is calibrated using detailed input-output data for 98 sectors and macroeconomic aggregates. We illustrate the role of network linkages by comparing the effects of sectoral productivity shocks in a full network economy versus a counterfactual 'island' economy. In the former, shocks to upstream industries are significantly amplified while those to downstream industries are dampened, relative to the effects of the same shocks in the island economy. We then apply the model to four policy scenarios: an increase in R&D tax credits; a set of entry regulation reforms; a spike in the price of imported oil and gas inputs; and an assessment of the aggregate productivity gains from AI adoption. In all cases, network forces account for a substantial share of aggregate effects. The framework provides a flexible and data-consistent tool for evaluating policies with strong sectoral dimensions.

Keywords: shock propagation; production network; aggregate productivity (search for similar items in EconPapers)
JEL-codes: E01 (search for similar items in EconPapers)
Date: 2026-06
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