No. 941 - The trend-cycle decomposition of output and the Phillips curve: Bayesian estimates for Italy

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by Fabio Busetti and Michele Caivano November 2013

A standard model-based trend-cycle decomposition of Italian GDP yields a likelihood function that is relatively flat and has two local maxima. A Bayesian estimation of the model identifies output gap and trend components that match the features of the Italian business cycle well. In a bivariate output and Phillips curve model it is found that: (i) the median value of the semi-elasticity of prices to the output gap is 0.5 after 20 quarters, (ii) the inflation cycle lags GDP on average by about 3 quarters.

Published in 2016 in: Empirical Economics, V. 50, 4, pp. 1565-1587