No. 158 - Demand and Supply Shocks in Industrial Output

In this paper we investigate the impact of three different kinds of disturbances on industrial output in Italy. They originate respectively in aggregate demand, technology and the labour supply. We first illustrate the theoretical restrictions which permit identification of the three shocks. Then the econometric identification is achieved by extending the Blanchard and Quah (1989) bivariate procedure to a multivariate case. We then compute the permanent component of industrial output. Our main conclusions are: i) output variability is significantly affected by technological shocks at all frequencies. Labour supply disturbances are also relevant, while demand shocks have a minor impact on the series; therefore the short-run behaviour of industrial production is largely explained by supply side shocks; ii) demand shocks play a more important role during the seventies than during the eighties. We suggest this might be due to a more counter-cyclical stance of economic policy during the last decade.