Three economic policy packages introduced in Italy between 2011 and 2017 have boosted the country’s GDP by between 2.5% and 6%, according to new research by Emanuela Ciapanna, Sauro Mocetti and Alessandro Notarpietro. What’s more, further increases are expected to materialise over the coming decade, bringing the overall long-run impact of the reforms on GDP up to between 3.5% and 8%. Of course, these effects must be considered net of all the other factors that may (positively and negatively) influence the Italian economy over the same period.

The study finds that the three sets of structural reforms – liberalisation of the services sector, new incentives for business innovation and improved efficiency of civil courts – have generated a sizeable increase in total factor productivity (a measure of efficiency in production) and a reduction in firms’ market power. Such increases in efficiency and service competition can significantly boost production.

The research also shows that the positive effects of Italian reforms targeting the product market extend to the labour market: the estimates indicate that by the end of this decade, they will provide an increase in employment by about 0.5% and a reduction in the unemployment rate by almost 0.4 percentage points.

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Structural reforms are measures designed to modify the very structure of an economy. They typically act on the supply side, by removing obstacles to an efficient (and equitable) production of goods and services, thereby increasing productivity and the growth potential of the economy.

For the past 20 years – particularly in the euro area since the sovereign debt crisis – the importance of structural reforms has been at the centre of economic debate in advanced economies and it has featured high on the agenda of international economic fora.

The new research quantifies the macroeconomic effects of three major structural reforms carried out in Italy between 2011 and 2017, with an innovative approach that blends microeconomic estimates and simulations of a macroeconomic model.

The three policy packages are: the liberalisation of services; new incentives for business innovation in an initiative known as the ‘Industry 4.0’ plan; and an increase in the efficiency of civil courts.

Microeconometric estimates based on sectoral and firm-level data indicate that these reforms generated a sizeable increase in total factor productivity (a measure of efficiency in production) and a reduction in firms’ market power. Model-based analysis factoring in these estimates reveals that such increases in efficiency and service competition can significantly boost production.

Accounting for estimation uncertainty, the analysis implies that by 2019, Italian GDP was between 2.5% and 6% higher than in absence of the reforms. Further increases are expected to materialise over the coming decade, bringing the overall long-run impact of the reforms on GDP up to between 3.5% and 8%.

Of course, these effects must be considered net of all the other factors that may (positively and negatively) influence the Italian economy over the same period.

Finally, the research shows that the positive effects of reforms targeting the product market extend to the labour market: by the end of the current decade, the estimates indicate an increase in employment by about 0.5% and a reduction in the unemployment rate by almost 0.4 percentage points.

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‘The macroeconomic effects of structural reforms: An empirical and model-based approach’

Authors:

Emanuela Ciapanna (Bank of Italy)

Emanuela.Ciapanna@bancaditalia.it

Sauro Mocetti (Bank of Italy)

Sauro.Mocetti@bancaditalia.it

Alessandro Notarpietro (Bank of Italy)

Alessandro.Notarpietro@bancaditalia.it