No. 1204 - Recent trends in economic activity and TFP in Italy with a focus on embodied technical progress

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by Alessandro Mistretta and Francesco Zollino December 2018

This work analyses the determinants of growth for the Italian economy since the mid-1990s, focusing on the role of total factor productivity (TFP), which is calculated considering the changes that occurred in the composition of both the labour input (as  we control for the different levels of skill across the labour force) and the capital stock (as it is made up of different assets each exhibiting different degrees of embodied technical progress depending on the time of installation).

TFP is confirmed to be the greatest drag on growth for the Italian economy in the last twenty years. TFP developments have also been affected by trends in capital accumulation: during the recession, the fall in investments delayed the regular replacement of old capital assets with new ones, which embody a more advanced technology; this significantly contributed to sharpening the decline in productivity. In recent years, the ongoing recovery in capital accumulation has on the contrary been fuelled by the recovery in the technical efficiency of capital, thus fostering the growth potential of the whole production system.