No. 29 - Potential Output, Output Gap, and Inflation in Italy in the Long Term (1861-2010): An Econometric Analysis

We exploit the new historical national accounts data for Italy over the period 1861-2010, built by Banca d'Italia and Istat, with the collaboration of the University of Rome "Tor Vergata". In the first part of the paper, a thorough study of the new data's statistical properties is presented mainly aimed to analyse the variability of the cyclical component of constant price GDP. The GDP cyclical component, interpreted as output gap, is used, in the second part of the paper, to assess the Phillips curve's ability to explain inflation dynamics over a wide variety of circumstances, over the 150 years of the country's history. In Italy, the relation linking inflation with the cyclical situation in the economy emerged only after World War I, while in US and UK it was operating already in the mid 19th century.