Gauging the extent of the impact of recent recessions on potential production is crucial in order to assess the amount of slack in the economy, and hence to estimate the resulting inflationary pressures and the speed of the recovery.
This paper investigate the effects of the prolonged double-dip recession on the productive capacity of the Italian manufacturing sector, employing three methods: a production function approach, a survey-based methodology and a statistical filtering of the industrial production series. We estimate that between 2007 and 2013 capacity contracted by 11–17%, depending on the method.
We also conduct an exercise to quantify the loss with respect to a counterfactual evolution of capacity in a ‘no-crisis’ scenario in which pre-2008 trends are extrapolated: in this case the loss is close to 20% for all methods. Finally, we identify the main sectors of activity responsible for the reduction in capacity in the baseline and counterfactual scenarios, and find that they don’t always coincide, reflecting uneven dynamics across sectors before and during the recession.
Published in 2016 in: Rivista Bancaria, Minerva Bancaria, v. 71, 2-3, pp. 203-223
