Demand and supply shocks in Italy: An application to industrial output

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 econometric identification is achieved by extending the Blanchard and Quah (1989, The American Economic Review 79, pp. 655-673) procedure to a multivariate case. Our main conclusion is that 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, although they act in the expected direction. Therefore, the short-run behaviour of industrial production is largely explained by supply side shocks. (C) 1999 Elsevier Science B.V. All rights reserved. JEL classification: C22; E32.