Recent Trends in Economic Activity and TFP in Italy with a Focus on Embodied Technical Progress

In this paper we provide fresh evidence on TFP performance in the Italian economy since 1995, taking into account the changing composition of primary inputs across different capital goods and employment skills, as well as technical progress embodied in different vintages of the productive assets. We first estimate a technical depreciation rate by using individual data on Italian industrial firms. We then obtain an experimental measure of the capital stock adjusted for technical efficiency, by augmenting the standard depreciation rate by our own estimate of technical depreciation (about 5% per year). Once we introduce our measure of capital stock in a standard growth accounting exercise, we find a less dismal performance of the Italian TFP than usually estimated. Focusing on the years between 2007 and 2016, the upward correction in TFP amounts to around 1.5% points in the overall period for the total economy and to about 2.5% points when only considering manufacturing. These findings shed a somewhat more positive light on future TFP developments in Italy, even more so should the efficiency of installed capital resumes improving following the fall during the crisis of years 2008-2013 caused by the slump in investment spending. Higher capital formation would imply a faster replacement of old vintages with more technically advanced ones.