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Title of Journal: Ital Econ J

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Growth and Cycles of the Italian Economy Since 1861: The New Evidence

Authors: Fabio Clementi, Marco Gallegati, Mauro Gallegati,

Publish Date: 2014/12/05
Volume: 1, Issue:1, Pages: 25-59
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Based on a newly-available large set of historical national accounts, the paper revisits the main features of economic growth and cycles in Italy for the post-Unification period 1861–2011. Alongside the structural changes in growth dynamics, the main sources of output and productivity growth are identified. As regards the analysis of the underlying cyclical component, a business cycle chronology is first established and then both the specific patterns of individual cycles and the co-movements of output with key macroeconomic variables are investigated. In the 150 years since its political Unification, Italy’s economic growth was mainly propelled by consumption and investments, whereas on the supply side the industry and services sectors were by far the main contributors, also because of the positive effect of labour reallocation to nonfarm activities. Over the same period, Italy experienced approximately 20 business cycles of varying duration and amplitude. Output fluctuations were dominated by the short-term variability of agricultural production before World War II and by fluctuations of the industry sector thereafter. The cyclical behaviour exhibited by aggregate demand components conforms quite well to that evidenced in the standard international business cycle literature, although some exceptions arise in the pre-World War II years.Earlier drafts of this paper were presented at the study day in honour of Guido M. Rey “L’economia italiana: modelli, misurazione e nodi strutturali” (Università degli Studi Roma Tre, 5 March 2010) and the conference “Sviluppo economico e benessere” (Università Politecnica delle Marche, Ancona, 5 and 6 November 2010). We are grateful to all the participants for their useful comments. We also thank Alberto Baffigi for his precious help with the historical sources used, and Claire Giordano and Francesco Zollino for sharing their data with us upon request. Last, but not least, we thank two anonymous reviewers for their thorough review and highly valuable comments and suggestions, which significantly contributed to improving the quality of the paper. The usual caveats apply.Italy has a solid and long tradition of studies dealing with the issue of reconstructing national accounts in the post-Unification period. The first set of historical national accounts from 1861 to 1956, due to the National Institute for Statistics (ISTAT 1957), was revised and improved by a group of researchers of the University of Ancona under the supervision of Fuà (1969). Maddison (1991) proposed a revision of the GDP series for the period 1861–1989 by lowering the initial levels of the ISTAT-Vitali GDP series, and then Rossi et al. (1993) reconstructed the GDP series from the expenditure side for the period 1890–1990 using the new benchmark for 1911 and the new estimates provided, respectively, by the Bank of Italy (Golinelli and Monterastelli 1990; Rey 1991). Recently, Fenoaltea (2005a, b, 2006) has produced, for the period between national Unification and World War I, the first entirely new estimates of Italian aggregate GDP since ISTAT-Vitali by combining Federico (2003) series for agriculture with his own series for industries and services. Finally, Baffigi (2013) has provided new GDP series, together with supply and demand side estimates, covering the 150 years after Italy’s political Unification as a part of the “150 anni” national accounts project that includes the Bank of Italy, ISTAT and the University of Rome “Tor Vergata”—as well as academics from other institutions.1The availability of historical macroeconomic time series has favoured a proliferation of studies, especially in recent years, on the nature and causes of business cycle fluctuations2 and—in a historical perspective—on growth in Italy.3 As a result, in the last two decades the knowledge about the historical patterns of Italian economy over such a long time span has considerably improved. From this point of view, the availability of new data provides the researcher with the opportunity to look at old facts and interpretations in new ways, and to answer the question to what extent these new estimates provide contrasting results about growth and cycles with respect to those presented in the previous literature, especially in the pre-World War II period.In this paper we revisit the Italian economic growth and cycles in the post-Unification period using the new historical accounts presented in Baffigi (2013) for the period 1861–2011. In particular, we analyze whether the revised estimates provide new evidence as to the presence and number of structural changes in GDP growth that can suggest a different alternative interpretation of the phases of Italy’s long-run economic growth, especially with regard to the interpretation that traces back Italy’s economic development to the beginning of the nineteenth century. Specifically, following the recent literature supporting the view that macroeconomic time series, and GDP in particular, can be represented by stationary fluctuations around a (deterministic) segmented trend (e.g. Rappoport and Reichlin 1989), we test for multiple structural breaks at unknown dates in the trend function of GDP growth rate as suggested by Bai and Perron (1998, 2003). Moreover, since the new dataset also provides us with new estimates for both the supply and demand sides, this paper presents an analysis of the impact of these revisions to the overall pattern of the various supply and demand components’ contributions to real growth.As regards the analysis of the underlying cyclical component, we take into account both the classical and modern definitions of business cycle, where the first analyzes the specific patterns of individual cycles and the latter the co-movements between GDP and different key macroeconomic variables. Although most macroeconomists share the real business cycle (RBC) view that the “business cycles are all alike” (Lucas 1977), we try to go beyond this approach by integrating modern RBC analysis with a detailed description of individual phases and cycles according to the National Bureau of Economic Research (NBER) traditional approach.4 The aim of our methodology is to provide empirical evidence on regularities and discontinuities in economic fluctuations and to reconsider the hypothesis of business cycles similarity of the predominant view. In particular, following the modern definition of business cycle,5 after isolating the underlying cyclical component corresponding to fluctuations of approximate length between 1.5 and 8 years, we analyze the empirical regularities observed in the co-movements among different aggregative time series. Moreover, following the Burns and Mitchell (1946) classical definition of business cycle analysis, which suggests to look at the characteristics of each individual cycle and phase in terms of duration, amplitude and steepness, we also check whether the revisions alter the key features of business cycle fluctuations, including the dating of turning points.The paper is organized as follows. Section 2 describes the new dataset and provides a brief comparison with previous estimates. The long run dynamics of Italian economic growth is analyzed in Sect. 3 by identifying structural breaks in GDP growth rate, along with the contribution of the various supply and demand components to economic growth. Section 4 presents the results of the analysis of the cyclical component of Italian GDP using both the classical and modern definitions of business cycle. Finally, Sect. 5 concludes.



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