The sovereign crisis and Italy’s potential output |
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Authors: | Andrea Gerali Alberto Locarno Alessandro Notarpietro Massimiliano Pisani |
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Institution: | Banca d’Italia, Directorate General for Economics, Statistics and Research, via Nazionale 91, 00184 Rome, Italy |
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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. |
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Keywords: | E32 E62 Sovereign risk Fiscal policy Potential output |
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